Lenders require mortgage repayment, one way or another, when the borrower dies.
A mortgage is a class of secured debt, or debt on which payment is guaranteed by an asset or lien. If the debtor does not repay the debt, the lender can take possession of the asset and resell it. In the case of a property with a mortgage, when the borrower dies one of several scenarios may play out, each leading to repayment of the mortgage.
Property Transfer
Typically, property transfers to an heir or surviving joint tenant after the borrower's death. Although the responsibility to repay the mortgage does not automatically transfer to the person who takes possession of the property, the mortgage must nonetheless be paid because the property remains tied to the mortgage irrespective of the original borrower's disposition. If it is not paid, the lender will most likely foreclose upon the property.
Due-On-Sale
Most mortgages include a due-on-sale clause which allows the lender to demand payment in full of the outstanding loan balance when the property transfers, whether through sale, inheritance or other means. If there is no due-on-sale clause, the new owner can assume the loan by notifying the lender and making payments on the mortgage. If there is a due-on-sale clause, the new owner must make some arrangements to have the mortgage paid off or risk the lender foreclosing on the property.
Exceptions
In 1982, the Garner-St. Germain Depository Institutions Regulation Act included provisions that prohibited lenders from exercising the due-on-sale clause under a several circumstances. These include transfers to a spouse or child who will live in the residence, to a surviving joint tenant or to a spouse or child in a court-ordered divorce settlement. The debt is still tied to the property, but the new owners in these circumstances are allowed to assume the mortgage.
Options for New Owners
If there is a due-on-sale clause and the new owner does not fall under one of the exceptions cited in the Garn-St. Germain Act, the new owner must get permission from the lender to assume the loan, which the lender may or may not grant, or take out a mortgage in his own name to repay the original borrower's mortgage. A third option is continue making payments on the mortgage without assuming it in name; however, the lender could enforce the due-on-sale clause and demand immediate repayment at any time.
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