Home loans are designed to be paid off by the signers of the loan contract, and the lender's claim is only for those specified on the contract. However, borrowers may die and leave the lender with no one from whom to claim payment. Most lenders have clauses dealing with the possibility of death in their mortgages, and states have laws that specify how major debts such as home loans must be handled in case of the death of the borrower. In most cases, the mortgage must be paid in full if the borrower dies.
Debt Obligation After Death
The debt obligation after the death of the borrower does not end. In other words, the lender does not lose the ability to claim payment from anyone, just the borrower. Generally, the home loan follows the house. Where the house goes, the obligation to pay the loan follows. The obligation for payment cannot pass to an heir without the house, and the house cannot be passed on without the debt being attached to it. In most cases, the house, along with other assets, goes into the estate of the deceased borrower.
Estate Payment Requirements
The estate is managed by an attorney or another appointed individual, who works to clear up important financial issues that follow a death. The estate typically pays off all the debts the deceased owed, including home loans. The estate first uses any cash to pay off these debts, but for most deceased borrowers, the cash payments are not enough, so the estate will sell the house to pay off the remaining mortgage amount.
Joint Obligation
In some cases, a mortgage has two signers to the contract, which is common if a married couple applies for a mortgage jointly. In this case, if one spouse dies, the obligation for payment remains with the other spouse. This means the lender can pursue mortgage payment from the other spouse, but this is the only instance in which that is the case. If only the deceased's name is on the mortgage contract, the lender cannot legally demand payment from surviving family members, although this may not stop the lender from trying.
Loan Specifics and Transfer
In some cases, lenders may allow a successor to assume the mortgage and continue making payments. If the lender has made no specifications in the mortgage contract, heirs typically have this option. However, many lenders counter this by adding a clause that requires full and immediate payment of a mortgage if the borrower dies. A lender may not trust a successor with unknown credit and income to continue paying for a mortgage.
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