Bereavement of a loved one is often an emotional time, making inheriting a house with a mortgage feel even more stressful. There are ways to relieve the added pressure, giving you added time to plan your next steps. We simplified everything you need to know if you have recently inherited a house with a mortgage. We have also added several useful tips!
What happens if you inherit a house with a mortgage (UK)?
There is an agreed instalment of payments when a loan is initially established. At this point, it is recognised that the estate (total value of assets) becomes collateral for the mortgage. If the borrower is unable to settle their monthly repayments, the bank can foreclose on a deceased person to retrieve their money.
For that reason, the appointed executor of the property will become responsible for settling the mortgage before distributing the profits to the beneficiaries. If you are the sole heir of a house with a mortgage and accept the position of an administrator, it is likely to be your responsibility to rectify the debt. To do this, you must first apply for probate.
When should you contact the mortgage lender?
It is essential to speak with the mortgage lender as soon as possible to inform them that the homeowner has deceased. Let the lender know you have inherited the house with a mortgage. They will be able to discuss the next steps with you.
Generally, the mortgage company will be flexible. Once the mortgage company is informed, they may allow the property may go into deficit without penalty. However, nothing further can be done without the grant of probate.
How to avoid foreclosure after the death of borrower?
There are several things you can do to prevent repossession when inheriting a home. Initially, you have a bit of time to choose the best way to resolve the debt and prevent a foreclosure. This is because the mortgage’s interest and payments are likely to be put on hold until the grant of representation has been finalised.
Ways to avoid a forced sale of an inherited property:
- Sell significant assets inside the house to settle the mortgage
- Refinance the house and continue making monthly repayments
- Decide to sell the home quickly to cover the costs of the mortgage
- Use your rainy day savings or personal assets
- Check the terms within the deceased’s life insurance
What happens to a joint mortgage when your spouse dies?
If your spouse passed away, you are not automatically solely responsible for the joint mortgage. Instead, you can’t transfer the lease. As such, you will need to apply for a new loan in your name. Keep in mind; you need to prove that you can afford to meet these repayments and meet the new mortgage requirements.
Financing a mortgage after the death of a spouse can be expensive. You can explore the terms and conditions within your partner’s life insurance. You may be entitled to money which could be offset against the mortgage. If their insurance coverage was placed in a trust, you might be able to avoid waiting for the completion of probate.
Home equity loan on inherited property
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If you want to keep the home, you will need to apply for a mortgage or cover the outstanding mortgage outright. However, the probate process must be completed before a new loan begins. As with every mortgage, the loan is subject to high credit checks, stress tests and affordability.
The loan can either be for a residency or buy-to-let. Remortgaging to rent the property is a viable option if you want to keep the property in the family name or hold off on a sale until a later date. However, there are significant responsibilities and costs associated with being a landlord. You must also pay Income Tax on the profits made.
Selling an inherited house with a mortgage
Once you are the legal homeowner, you can sell an inherited home with outstanding debts. The remaining amount left on the lease will merely be deducted from the sale. Of course, you will need to account for inheritance tax as well.
If you want to sell up quickly, you can liaise with a home buying company. By doing so, you could avoid some of the costs involved in selling a house. Alternatively, you could sell through an estate agent or auction, which will take longer and require more involvement from you.
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