Inherited a House with a Mortgage?
Posted on September 12, 2022 by Amanda Gladin
Inherited house with mortgage is a common occurrence in the real estate world. Either with a regular mortgage or nowadays a reverse mortgage. Not to mention other small liens or judgements owed by the deceased. Let alone taxes.
Let’s take a closer look into what those mortgages, liens and taxes could mean when transferring ownership to yourself or when selling.
Most homeowners utilize a mortgage to purchase their homes, unless you have the cash to purchase the house outright. So inherited house with mortgage is a common occurrence. They are available for extended periods of time. Mainly between 15 to 30 years and have either a fixed percentage rate or an adjustable rate mortgage.
Fixed Rate Mortgage
This is the most common type of mortgage found on a property. It has a set payment amount, but the way the interest is calculated is based on an amortization schedule that can be a bit confusing.
The easiest way to look at it is like sliding down a hill. Starts off paying a lot more interest in the beginning, but less towards the actual principle balance. Verses when you are closer to the end of the 15 year term, for example, where you are paying more towards the balance and less interest.
This just adds a few steps to the transferring of ownership or to the sale process. Whether you plan to take over the mortgage or sell the property, it’s best to have a title company open title to verify what all is attached to the property and the deceased. Inherited house with mortgage doesn’t really mean there is only a mortgage owed.
Adjustable Rate Mortgage
This one is probably not one to worry about, unless the deceased bought the house in the last couple years. It’s very rare that someone buys a property on an arm without thinking they would sell it early on, unless they thought their financial security would get better with a future change in circumstances.
That may sound a bit morbid. That is not at all my intention. Here is an example, if you plan to only live in the house for a few years and want to take advantage of the lower percentage rate while finishing up college. Or maybe they were on a short track to a promotion at work and couldn’t afford the bigger payments initially.
Whatever the reason, an arm mortgage usually has an ulterior motive. And not in the negative connotation that phrase usually accompanies. This is not the most common inherited house with mortgage situation we see.
As with a reverse mortgage, we see a lot of older retired people utilize this option. Sadly, Texas has a large population of seniors, so the market for reverse mortgages is flooded with these options. When looking into information about inherited house with mortgage, this needs a bit more digging.
Not that I am biased against them. I think all things have a time and place. If you’re someone that doesn’t have someone to leave a house to, may as well enjoy the fruits of your labor. However, a lot of times people are not informed on the consequences of a reverse mortgage.
A reverse mortgage’s payoff works the opposite way as a traditional mortgage. The interest is accruing, so if you plan to pass this property on to someone else after you pass, most of the equity may be gone if you’ve lived past the age you thought you were going to live.
If you are the one the house was left behind to, then you’re going to need to get a payoff and the criteria you need to meet for this type of mortgage.
Most of them require the house to be sold within a certain time frame of the deceased passing, as well as, within a specific percentage of the value of the house. So it’s best to consider this criteria before making a decision to refinance into your own name or when selling it.
These are usually pretty easy. There is usually something attached to the title commitment that a title company would pull when the title is opened. Sometimes these can be from an air conditioning installation that the deceased was still paying on.
They will just need a payoff requested from the title company to clear them at the time of the sale. Or you’ll need to work out a payment arrangement with the lienholder, if you plan to keep the property.
Judgments however follow the person. No matter what house they own. It becomes a judgment against the estate of the deceased. Selling the property is one of the main ways those judgments get paid off. Whether the seller is deceased or just selling the house.
Texas on the other hand, doesn’t allow all judgments to be paid off on a homestead property. You’ll need to check if any of them can possibly be partially released. Only a title company can accurately determine this with the sale of a property.
Welp! You knew it was coming. Taxes. We all get stuck paying them. Even when there was a senior exemption or a tax deferment. Hopefully this process is started shortly after the deceased passes and not 10 years after the fact.
Once again, not to be cruel, but taxing authorities can charge roll back taxes up to 5 years back, as well as, charge interest and penalties.
I think that is the cruel part, but we all know what we signed up for buying in the areas we do, with the taxes accruing after our deaths until the heir transfers or decides what they choose to do with the property after inherited house with mortgage.
Please keep the following in mind if you inherited house with mortgage, because sometimes people on a fixed income find this to be a necessity. It’s a harsh reality for most people living on social security or disability. They were doing what they needed to do to survive with more liquid equity.
Exemptions need to be removed immediately following the death of a loved one. When I say immediately, I mean within the same year they passed. Exemptions are like a discount we get on our taxes, but those exemptions end with that person’s life.
As for tax deferments, these can hit heirs so hard because they think the house had no taxes owed, but the deceased qualified for a tax deferment due to age or disability.
This means that the taxes on the property were still warranted, but that they have been deferred for a predetermined amount of time. Death is usually the end of the deferment. Meaning taxes have compounded with interest – usually no penalties – for years.
For whatever reason mentioned above, you found this article, I’m hoping it helps remove the dread of trying to figure this out yourself.
If you’re done trying to figure this part out and want to just sell with ease of not having to handle these above hurdles, give us a call. We are investors, but we will gladly help guide you through this process, even if you do not sell to us.
Give us a call today 832-839-0890