What Happens to the House and Mortgage When Someone Dies?

Attorneys handling estate planning and probate matters are often asked, “What happens to the house and mortgage when someone dies?” To answer that question, one must understand that almost all mortgages and deeds of trust contain a due on sale clause. A due on sale clause is a provision that bans the homeowner(s) from transferring any interest in a property. If a homeowner transfers an interest in the home, then the bank may cause the entire balance of the note to be due at once. If the note remains unpaid, then the lender may foreclose on the property.

Obviously, that seems a little harsh for the heirs. Therefore, in about 1983, Congress exercised a bit of wisdom and made effective the Garn-St. Germain Depository Institutions Act. The federal statute provides certain exceptions to the due on sale clauses contained in mortgages and deeds of trust. The exceptions for the purposes of this post state that a lender may not exercise a due on sale clause if the right arises from:

(i) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety. 12 U.S. Code § 1701j–3(d)(3);

(ii) a transfer to a relative resulting from the death of a borrower. 12 U.S. Code § 1701j–3(d)(5);

(iii) a transfer where the spouse or children of the borrower become an owner of the property. 12 U.S. Code § 1701j–3(d)(6); or

(iv) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property. 12 U.S. Code § 1701j–3(d)(8).

For the homeowner or a descendant of the homeowner, the law obviously answers a huge question about a person’s often largest asset. Also, it’s nice to know that transferring the property to a properly drafted revocable living trust (inter vivos trust) will not cause your mortgage to become due.

In regards to whom gets the house, the deceased person’s will or trust would control. If the person died without a will or trust, then the laws of descent and distribution would control. In Texas, which is a community property state, the beneficiary could vary wildly depending upon the family dynamics.

If you need estate planning or probate assistance, you should contact an attorney near you.

Robert Newton is an attorney based in Frisco, Texas, that practices estate planning, real estate law, business law, and corporate law. This post is meant for informational purposes only and does not constitute legal advice.