What Happens to a Mortgage After the Owner Dies?

Given the long-term nature of most residential mortgages, it is not at all uncommon for a mortgage to be still in existence at the time that the owner of the property dies. The property itself will be transferred either due to the terms of the deed, the will the owner had in place, another estate planning device such as a trust, or the laws of intestacy in the specific state (intestacy refers to the process of distributing property when there is no will, trust, or other device in place to transfer the property).

But, when a mortgage is still on the property, the mortgage will still have to paid: the only question is by who. With proper estate planning, you can address this issue now rather than leave it to your beneficiaries to figure out.

What Happens if a Mortgage Is Not Paid

Again, a mortgage taken out on a property – whether to purchase the property or using the property as collateral for some other purpose – is going to survive the death of the person who took out the mortgage.

Generally, the only way for a mortgage to be extinguished, or in other words removed from a property, is for the balance to be paid in full or for there to be a foreclosure action, in which the property is sold to pay off the remaining mortgage balance (and the bank financing the mortgage can go after the owner for a separate deficiency judgment if the sale price does not cover the remaining balance).

What this means is that, if a person inherits a house and there is a mortgage on it, the mortgage must still be paid. If the mortgage is not paid, the bank will have the right to foreclose on the property even if the current owner who inherited the property had nothing to do with taking out the mortgage.

Various Ways That a House Can Transfer Upon Death

Before we get into exactly how an owner might prepare for handling the mortgage of a property, let’s look at the various ways the property itself may transfer at death.

First, when two people (such as a husband and wife) own the property jointly as joint tenants with rights of survivorship, then the property will automatically transfer from joint ownership to sole ownership by the surviving party (assuming there will only two joint owners) at the death of the other owner, even if a will says something else. In such a case, the surviving spouse will be obligated to pay any remaining mortgage balance.

If the owner devised the property in a will, then that property will go to the named beneficiary in the will, and this will be completed by an executor in the probate process. Many people use trusts nowadays to transfer their property, which achieves the same effect as a will, except that it takes place outside of the probate process. If there is no will or trust devising the property, then a state probate judge will transfer the property via the laws of intestacy, which favor members of the immediate family.

Mortgages Are Not Automatically Exonerated in California

It used to be the case that, when a house or other piece of real property was transferred through the probate process, the probate court would require that the executor of the estate “exonerate” the mortgage by using other funds from the estate to pay off the remaining mortgage before transferring it so that the beneficiary could take the property free and clear of any mortgages.

This is no longer the case in many states. In California, Probate Code 21131 says that: “A specific gift passes the property transferred subject to any mortgage, deed of trust, or other lien existing at the date of death, without right of exoneration, regardless of a general directive to pay debts contained in the instrument.”

A creator of a will or trust, however, can create an estate planning document which does direct that any remaining mortgages be paid off by other funds in the estate when passing the property to a beneficiary, but this must be stated clearly, and the document should specify the source of funds for doing so. Speak to a California estate planning attorney for more details.

Update Your Will With a Pasadena Estate Planning Attorney

Estate planning and probate attorney Christopher B. Johnson, located in Pasadena, California, has years of experience in all aspects of estate planning, and works with clients from all walks of life to create wills, trusts, and other estate planning devices that reflect their needs and those of their beneficiaries. To request an immediate consultation, contact him today at (877) 755-9178.