When a spouse passes away, her debt remains behind. It's important to understand how estates and debt work to avoid unpleasant surprises during a difficult time. Spouses who owned property together may become liable for mortgage payments when the other partner dies. You should make sure to discuss the possibility with your lender before signing your mortgage agreement.
The Will
The will is used in creating the deceased person's estate and can also be used to assign responsibility for a property, including the mortgages on the property. Without a will, state and federal laws dictate the disposition of the deceased person's property. Jointly held property is likely to remain in the possession of the surviving party even if this is not specified in a will.
The Estate
The deceased person's estate is made up of his personal possessions. Any debt the deceased has accumulated is satisfied out of the proceeds of the estate. This can include mortgages if the lender has used a due-on-sale clause and the spouse is not exempt. In some cases, the mortgaged house may need to be sold in order to satisfy the debts of the deceased and clear the estate. This is the probate process, and once it is completed the instructions of the deceased person's will are carried out and property is distributed.
Your Lender
Your lender also has provisions dictating what happens when a mortgage holder dies. Many mortgages contain a due-on-sale clause, which calls the balance of the mortgage due on the sale or transfer of the property to a spouse. This includes transfer of the property due to inheritance. The surviving spouse must then make the payments or take out a mortgage of her own on the property to satisfy the lender. If there is no due-on-sale clause or the surviving spouse is considered exempt under the Garner-St. Germain Depository Institutions Regulation Act, it may be possible for the surviving spouse to simply assume the current mortgage payments and continue the mortgage.
Considerations
Even while an estate is being settled, mortgage payments need to be kept current or the lender can foreclose on the house. If your mortgage contains a due-on-sale clause, consider taking out a term life insurance policy that decreases in value over the life of the mortgage. This type of policy provides a death benefit that should enable your heirs to clear the balance of the mortgage and assume ownership of the property without worry.
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