When a person dies with an unpaid mortgage loan, his estate is responsible for handling the disposition of the property, including the mortgage note. Depending on the wording in a person's will, his spouse or other beneficiary may also be responsible for paying off the house. The mortgage debt is likely due and payable soon after the borrower dies.
Mortgage
A mortgage is an installment loan that is secured by the value of a home. When a person dies before paying off a house, the mortgage debt may pass to his estate, spouse, beneficiaries or any co-borrower on the loan. Clauses within the mortgage note as well as the terminology of a person's will dictates what happens to the mortgage loan after the borrower dies.
Default
Most mortgage loans contain a clause stipulating that any ownership transfer is a condition of default. In most cases, default accelerates the loan, making it payable in full on demand. When a person dies, ownership of the property is transferred in accordance with state laws and with the person's will. If the mortgage loan goes into default, the estate, co-borrower or beneficiary must pay the mortgage loan through selling the home or through refinancing.
Will Terminology
If a person dies before paying off a house, the terms of her will can dictate the ownership of the home, which equates to the responsibility of the mortgage debt. If the deceased bequeaths the house with a mortgage to a beneficiary subject to the mortgage, the beneficiary must pay off the mortgage debt. If the house is bequeathed as not subject to the mortgage, the estate pays off the mortgage debt before transferring the title to the house to the beneficiary.
Mortgage Life Insurance
Homeowners can elect to purchase a mortgage life insurance policy to pay off the mortgage debt in case of death, disease or disability. Mortgage life insurers are often associated with the mortgage lender. Proceeds from other types of life insurance with designated beneficiaries may also be used to pay off the mortgage loan at the time of death. A life insurance policy designated specifically for paying off the mortgage may not be as beneficial to the beneficiaries of a person's estate as one that is not limited with regard to usage.
Tags: mortgage debt, mortgage loan, person dies, life insurance, paying house, person will