Who Owes the Mortgage Debt if the Owner or Borrower Dies?

As a general rule, when someone passes away, the estate will be liable to pay the creditors of the deceased for whatever the deceased owed those creditors. That assumes that the creditors timely and properly file their claims against the estate and it assumes that there aren’t challenges to the creditors’ claims, by the estate or by the personal representative.

But although debts of the deceased live past the death, and must be paid by the estate, one kind of debt works a bit differently: mortgages.

Paying Back the Debt

To understand how mortgages work in probate, you must understand the difference between owing the money, or personal financial responsibility for the debt, as opposed to the mortgage lien.

Nobody except the deceased, can ever be forced to pay back the mortgage loan, once the deceased passes away, if the deceased is the only one who took out or signed for the loan. That includes the estate, and assets of the estate, which cannot be used to pay back the mortgage, as well as any beneficiaries, who also won’t have to pay back the mortgage loan.

That is true, even if the property is “upside down,” or “under water,” where there is more money owed on the property than what the property is actually worth. While a foreclosure action on upside down property would normally end in a personal, deficiency judgment against the borrower, there can be no such deficiency judgment, when the borrower passes away.

What About the Lien?

That’s the good news. The bad news is that the mortgage lien still survives—that means that although the bank cannot get any money from anybody once the borrower dies, the bank can still foreclose upon, and sell, the property.

If the property is upside down, the beneficiaries will owe nothing to the bank, but they also will get nothing from the sale of the home.

But if the property does have equity, then the property will be sold, and the surplus (the amount of the sale that exceeds the loan amount), becomes estate property, and distributed in accordance with the will, or with Florida’s intestate statutes, if there is no will.

Accounting for Surplus

Many people who make wills do not account for this surplus. If not, what if nobody can pay the mortgage and it gets foreclosed on but there’s a pot of money after the sale, the surplus funds—who gets those funds?

If you don’t account for those amounts in your estate documents to say who gets those funds, they will get distributed in accordance with Florida’s intestate statutes, which may or may not be what you want to happen.

Continuing to Pay the Mortgage

There are cases where a bank may allow those who inherit property, to continue to pay the mortgage.

Sometimes, this requires the beneficiaries qualifying as if they were taking out a mortgage and sometimes it does not, but taking over mortgage payments, if beneficiaries can afford to do so, is one way to avoid post-death foreclosure.

Questions about real estate in probate court? Call the West Palm Beach estate planning attorneys at The Law Offices of Larry E. Bray today for help.

Sources:

rocketmortgage.com/learn/who-is-responsible-for-a-mortgage-after-the-borrower-dies

experian.com/blogs/ask-experian/what-happens-to-your-mortgage-when-you-die/