Inheriting Real Estate – Refinance?

Update 1-21-2015: The 1982 Garn-St. Germain Depository Institutions Act states that a lender may not exercise its option on a due-on-sale clause in certain circumstance including transfer of real property to a relative resulting from the death of a borrower. Which means spouses on title should not lose the home to the lender as long as the mortgage remains current. If inherited mortgage falls behind, then a lender can exercise their foreclosure rights. 1-20-2015 Realty Times Article – Dealing With An Inherited House.

With the possibility of the inheritance taxes changing (i.e., expiration of the related Bush tax cuts), here’s a good question I caught on Clark Howard show recently while Ilyce Glink was hosting:

“Do you have to refinance the loan on a house you have inherited?”

I think it all depends …..on whether the bank wants to proceed with any action.

There is normally a “Due on Sale” clause where the loan may get called in once the property changes hands/ownership.  Typically, the filing of the Death Notice in public records may trigger notification to the lender that a death occurred.

My gut reaction is that if there is alot of equity in a property, or it has the potential for higher and better use resulting in a great price, then the lender may take action to demand full payment (where you would have to sell, refinance or lose the house) or they take the property.

8-23-2014: The Consumer Financial Protection Bureau (CFPB) issued an interpretive rule to clarify that when a borrower dies, the name of the borrower’s heir generally may be added to the mortgage without triggering the bureau’s ability-to-repay (ATR) rule.

“Losing a loved one should not mean also losing your home,” said CFPB Director Richard Cordreay. “The interpretive rule makes it clear that when family members inherit property, they can take over the mortgage without jumping through unnecessary hoops. This gives heirs an opportunity to work with the lender to pay off the loan or seek a loan modification.”

I suggest you consult with a real estate attorney since there may be other local, state, or federal rules of property transfer and notice (not to mention homeowner’s insurance and property taxes) that may be affected.

Overall, if taxes and insurance are escrowed by the lender and you can continue to make the payments, I guess it’s up to the bank.

Here is a link to a North Carolina Real Estate planning blog that mentions a Federal law (12 USC § 1701j-3(d)) that outlines exemptions from lenders invoking the Due on Sale clause for inheritance.

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