Does a mortgage need paid after death?


An average mortgage transaction can be considered in terms of two main parts: The note and the mortgage.

The Note
The document that evidences the terms under which parties agree to lend, borrow, and repay an amount of money is a note or promissory note.  The note is a contract between the lender, typically a bank, and the borrower that outlines and defines each party's obligations with respect to that loan.  In addition to stating the terms of repayment, the note typically indicates the different actions of the borrower that will be considered a default of the note. 


The Mortgage
As part of the borrower's obligation under the note, specifically identified property must be given as collateral for the loan.  The document that identifies this property and evidences its use as collateral is a mortgage.  In addition to the terms of default found in the note, the mortgage also indicates terms that will constitute default.  An important aspect of the mortgage is its continued validity against the described property until the lender takes official action to indicate that it is no longer effective.

Another way to consider this is that the mortgage goes with the property, not with the borrower.  If a borrower sells the secured property without ensuring that an existing mortgage is satisfied, the secured property continues to remain collateral for the borrower's debt and can be foreclosed by the lender.  The lender has the right foreclose even though the secured property has a new owner and even though the new owner did not borrow or receive any money from the lender.

Mortgage After Death
Just as with the deceased's unsecured debts, a note associated with a mortgage is not forgiven simply because the borrower dies.  However, unlike the deceased's unsecured debts, a note associated with a mortgage has a claim to specific property for repayment.

When the deceased's estate does not have enough assets to fully pay the note, the lender can take the mortgaged property to the extent necessary to fully satisfy the remaining amount of the loan.  According to the same concept stated above, the mortgage goes with the property, not with the borrower: even though the borrower dies and is no longer associated with the property, the property continues to remain collateral for the borrower's debt.

In other words, the deceased still owes the loan, the property is still subject to the mortgage, and the property can be sold to repay the loan if necessary.

Insufficient Liquid Assets
Harriet takes a loan, granting a mortgage to her individually owned house.  Harriet later dies without a will and is survived by her two sons, David and Ricky.  At the time of her death Harriet owes $50,000 on the note and has a $75,000 estate, of which $55,000 represents the value of her house. 

Although Harriet's total estate ($75,000) has a value greater than the loan balance ($50,000), only $20,000 is available as cash, because her house value ($55,000) represents a portion of the total estate value.

In these circumstances, the estate must sell the house to repay the loan, because it simply does not have any other means to make the required repayment of the loan balance.  This does not necessarily mean that the house must be sold to a stranger, but the loan must be repaid and the house is the estate's only means for obtaining the necessary funds.

The house may be sold for $55,000 on the open market to repay the $50,000 loan, distributing the remaining $5,000 to Harriet's heirs along with the $20,000.  The house may also be sold to one of the heirs, who must independently obtain the necessary funds required to make the purchase.  If David wishes to retain the house, he must pay the balance of the loan, as well as ensure that Ricky receives payment for his share of the house's equity.

Although David may use funds from any source to repay the satisfy the loan, these transactions are typically conducted as a purchase because the heir borrows the required funds from a bank who requires a new mortgage against the property.  

Grant of House Subject to Mortgage
The phrase "subject to mortgage" means that the property is conveyed with the mortgage in place.  These transactions require the grantee to satisfy the mortgage, which means that the grantee must satisfy the underlying debt.  Suppose that Harriet has a will that gives this house to Ricky subject to the mortgage and the remaining estate to David.  Although Harriet has given the house to a specifically named person, it is still very likely that the loan balance will need to be satisfied.

As stated earlier, the note and mortgage will each contain terms that indicate what actions by the borrower will constitute default.  Most of these documents will contain a clause that indicates any transfer of an ownership interest in property will be an event of default.  The average loan documents also indicate that default permits the lender to accelerate the loan, which means that the entire remaining balance is due immediately.

When Ricky receives the house from Harriet's estate, the entire loan balance will become immediately due and require someone to repay it in full.  Because the mortgage goes with the property and not the borrower, Ricky will either repay the loan or the lender will use its rights under the terms of the mortgage to foreclose the property for repayment.

Grant of House Not Subject to Mortgage
Mortgaged property may also be given to a specifically named person with the expectation that  the remaining loan balance will be paid by the estate.  When this is done the estate's assets must be used to repay the loan before any assets are distributed to the remaining beneficiaries.

Using the same facts as above, Ricky would basically receive the entire estate and David would not receive any share.  However, with those same facts as above, even if the house is given to Ricky with instructions that the estate pay the loan balance, the estate is still in a situation where there aren't sufficient liquid assets to repay the loan and will be faced with the same options as before.