The high price of homes on Long Island usually means that houses are not left to fall to pieces, but absent good estate planning, things go wrong. More times than you’d expect, our office receives a call from a family member about a house that has fallen into financial distress because the mortgage is not being paid and they don’t know what to do.
In "What Happens When a Homeowner Dies before the Mortgage Is Paid?" The Wall Street Journal looks at ways to prevent this scenario from taking place.
Biggest takeaway: borrowers should try to make sure that an outstanding mortgage becomes no problem for their loved ones.
The mortgage is secured by the house. Nonpayment can't damage an heir's credit score unless he or she is a co-signer on the mortgage. They should keep paying on the mortgage if possible because missed payments could incur penalties and lead to foreclosure.
Lenders notified of the borrower's death right away are usually understanding about resolving estate issues to avoid foreclosure.
Postmortem mortgage policies vary depending on the lender. These terms are usually in the fine print of the mortgage.
See if the lender will permit anyone else to assume the mortgage upon the borrower's death. If the deceased is the only borrower, most lenders rarely do this. In addition, if spouses are co-borrowers, don't assume that the surviving spouse can just take over the same note and terms when it's the sole breadwinner who passes away.
A federal law places restrictions on lenders' ability to cancel or call loans due to death; however, the prohibitions exist only if certain conditions are satisfied.
When a lender is informed of a borrower's death, it may be reluctant to release loan information because of privacy restrictions. With a death certificate, survivors and administrators may have to provide additional information to show their legal status.
The Consumer Financial Protection Bureau introduced new borrower protections in 2014 to make it easier for heirs to acquire account information, pay off the loan, or request a loan modification after the death of a homeowner. The new rules mandate that loan servicers promptly communicate with heirs after being notified of a borrower's death.
The goal is avoiding unnecessary defaults and foreclosures.
In addition, when estate planning involves real estate, whether a borrower is on the property title also matters. If homeowners anticipate issues among their heirs over the fate of the property, they should put their inheritance wishes regarding who inherits and/or gets to stay in the house in their will or other estate planning document.