Inheriting a Home and Loan - New York Times

A recent interview with New York Times reporter Vickie Elmer inspired my post "What Happens to the Mortgage when Property is Transferred to Beneficiaries at Death?".   Vickie took some of my thoughts, and those of other attorneys and loan officers, to provide a framework to "Inheriting a Home and Loan".

Some points from the article to consider:

  • It’s like getting a gift with a string,” said Judith D. Grimaldi, a principal of Grimaldi & Yeung, an estate planning law firm in Brooklyn. Thirty-one percent of people 65 and older, in fact, have home mortgages, according to the Census Bureau. “Most of my clients just end up selling the house,” Ms. Grimaldi said, “taking the proceeds and saying, ‘Thank you, Mom.’ ”
  • The survivors, meanwhile, should look at the inheritance of property from a practical, economic perspective. “You need to look very strongly at whether you can afford to maintain the mortgage and maintain the property,” Ms. Wheatley-Liss said.
  • Although there may be some emotional attachment to the home, having [the home] appraised can help determine whether it’s worth keeping. “The question would always be: ‘Are you protecting equity?’ ” said Michael McHugh, the president and chief executive of Continental Home Loans in Melville, N.Y.
  • The survivors should contact the lender early on to let it know that the borrower has died and that they are the heirs, or the executor of the estate, and to determine the loan’s status. Mr. McHugh suggests sending the lender a copy of the death certificate and a letter from the estate’s lawyer.
  • It is also important to determine whether the deceased relative has stayed current on the property taxes, if they are not paid through the lender.

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What Happens to the Mortgage when Property is Transferred to Beneficiaries at Death?

Generally speaking, if you transfer a piece of real property subject to a mortgage to another person, that transfer violates the "due on sale" clause in your mortgage, essentially making the mortgage immediately due in full.  In the course of buying or selling property, you would pay off the mortgage upon the sale of the property.  However, what happens when the property is transferred due to the death of the owner?

Federal law provides some exceptions to the "due on sale" clause when the property subject to a mortgage (other than a reverse mortgage) is being transferred as a result of the person's death. While a full list of the exceptions to the "due on sale" rule can be found in The Garn St. Germain Depository Institutions Act of 1982, (U.S.C.) 1701j-3(d)(8), for estate planning purposes, property owners should be aware that the "due on sale" clause will not apply to:

  • a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
  • a transfer to a relative resulting from the death of a borrower

So, if you own property jointly as (1) joint tenants with rights of survivorship, or (2) tenants by the entirety (for married persons only),  with any person (relative, friend, business partner, life partner) and that person dies, you get full ownership of the property by operation of law (i.e.:  the property does not pass through the person's Will, but instead passes directly to you as the joint owner), AND the mortgage continues, with no alteration to its terms.

If you give the mortgaged property to a person through your Will, a Trust, or intestacy if you don't have a Will, AND the person is your relative, then the mortgage can continue upon the transfer of the property to the new owners.  

Some planning notes:

  • The exception applies to properties with no more than 4 units (i.e.: a multi-unit property with 5 or more units would not qualify for the exception)
  • The exception includes a transfer of stock in a co-op
  • Same sex couples should beware that they may not be deemed a "relative" for purposes of inheriting property subject to a mortgage; it may be better planning to hold title as joint tenants with rights of survivorship during both partners lifetimes
  • Just because a person inherits the property and the mortgage won't be called, doesn't mean that the beneficiary can afford the mortgage.
  • In doing estate planning you should consider if the beneficiary can in fact maintain the property you are leaving them. 
  • When inheriting mortgaged property, you should consider if you can afford the current mortgage.

Two questions that I couldn't find quick answers to and I would appreciate feedback on:

  1. Who is a "relative" for purposes of the Garn St. Germain Act?
  2. Does a transfer upon death to a trust for the benefit of a relative come within the exemption?