The Mortgage Follows the Property
Louisiana law allows the heir who inherits mortgaged property to provide for the mortgage. That means, if you agree to take ownership of the mortgaged home, building, or land, you also agree to continue paying the mortgage; however, you do not have to pay off the remaining mortgage before becoming the property owner. Instead, the mortgage becomes your legal responsibility. You are responsible for paying the mortgage just as you would have been if you had applied for and taken out the mortgage on the property from the time of initial purchase.
Five Questions You May Need Answered Before You Inherit Real Estate
Paying a mortgage is a big financial responsibility. Even if you want the property, it’s essential to get all of the legal and financial information necessary to make an informed decision before you inherit the debt that goes along with it. For example, you may want answers to the following questions:
What if the Mortgage Had a Cosigner?
A co-borrower or cosigner to the loan may be legally required to pay the loan after the other mortgage borrower passes away. However, if someone other than the co-borrower inherits the property, the new owner may become responsible for paying the mortgage.
What if I Don’t Want to Take on the Mortgage?
You don’t have to accept your inheritance if you don’t want the financial burden of the mortgage. However, you should understand all of the financial implications of your decision before you decide to refuse the bequest. There may be ways to refinance the property or modify the loan that allow you to assume the mortgage comfortably.
What if There Are Multiple Heirs?
Complications may arise when multiple heirs inherit a mortgaged property. There may be disputes about who uses the property and who pays the mortgage. Generally, there are three options if you find yourself in this situation. You and the other heirs may choose to: (1) sell the property, pay off the mortgage, and divide the remaining profit between you; (2) agree on how the property will be used and the mortgage will be paid; or (3) hire an attorney to resolve these issues.
What Happens if No One Pays the Mortgage?
The bank or mortgage servicer has a legal right to be paid. If no payments are made on the mortgage, the loan holder may begin foreclosure proceedings and sell the property. Any money from the foreclosure that is in excess of the loan amount will go to the estate for distribution.
How Can I Make This Process Easier?
You and your family are likely grieving the loss of a loved one if you’ve inherited a mortgaged property. It can be hard to mourn your loss and consider all of the financial and practical implications of this type of bequest. Accordingly, you may wish to discuss all of your legal options with an experienced Louisiana succession attorney.
Talk to a Louisiana Succession Lawyer Before the Succession Is Settled
Don’t wait until mortgage payments are missed, foreclosure proceedings have begun, or the succession is settled to contact an attorney. Instead, whether or not you intend to accept the inheritance, we encourage you to contact our Louisiana probate attorneys today to learn more about your legal options. Each year, we help hundreds of Louisiana families navigate the succession process, and we are ready to help you deal with any mortgaged properties and other bequests.
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What Happens to a Mortgage When the Property Owner Dies in Louisiana
When a person who owns mortgaged real estate dies in Louisiana, the mortgage does not die with them. The debt secured by the mortgage remains attached to the property and continues as an obligation of the estate. The lender’s security interest — the mortgage lien recorded against the property — gives the lender the right to foreclose if the debt is not paid, regardless of who now owns the property. Inheriting mortgaged real estate means inheriting both the asset (the property) and the encumbrance (the mortgage) together. The heir cannot take the property free and clear of the mortgage simply by inheriting it.
Federal law significantly affects what happens to mortgages at death. Most residential mortgages contain a “due-on-sale” clause that technically requires the lender’s approval before the mortgage can be transferred to a new owner. However, the Garn-St. Germain Depository Institutions Act of 1982 — a federal law — prohibits lenders from enforcing the due-on-sale clause when property transfers to a borrower’s heirs upon the borrower’s death. This means that a child who inherits a parent’s mortgaged home is protected from the lender immediately calling the entire loan due. The heir can take over the property and continue making the existing mortgage payments without triggering the due-on-sale clause.
The heir who inherits mortgaged property is not personally liable for the mortgage debt simply by inheriting the property. Personal liability on the mortgage attaches to the person who signed the mortgage agreement — the original borrower. An heir who accepts the inheritance takes the property subject to the lien but does not become personally obligated to pay the debt. The consequence of this distinction: if the heir stops making payments and the lender forecloses, the lender can take the property, but it cannot pursue the heir personally for a deficiency between the property’s sale value and the outstanding loan balance (assuming the heir did not separately assume personal liability for the loan).
The Heir’s Options When Inheriting Mortgaged Louisiana Real Estate
An heir who wants to keep the inherited property has three main paths. First, they can simply continue making the existing mortgage payments — the federal protection against due-on-sale enforcement allows them to do this without renegotiating the loan. If the interest rate and terms of the existing mortgage are favorable, continuing the existing loan is often the most economical choice. Second, the heir can refinance the mortgage in their own name, which requires qualifying for the loan based on their own credit and income. Refinancing may be advantageous if the heir wants to change the loan terms, consolidate other debt, or unlock equity in the property. Third, if the heir does not want to keep the property, they can sell it, use the sale proceeds to pay off the outstanding mortgage balance, and retain the equity.
Communication with the lender after the property owner’s death is an important early step. The heir should notify the lender of the death, provide a death certificate, and establish communication about the account’s status. Most lenders have a loss mitigation or estate relations department that handles accounts in this situation, and establishing contact early prevents the account from falling into delinquency while the heir figures out the succession and their options. The lender will typically work with the heir during the succession proceeding — which formally transfers title to the heir — without demanding immediate full payment.
When multiple heirs inherit mortgaged property together — as co-heirs in an intestate succession or as co-legatees under a will — the situation becomes more complicated. All co-heirs must agree on what to do with the property: keep it, sell it, or allow one heir to buy out the others. If one heir wants to keep the property and the others do not, the heir who wants to keep it typically needs to refinance the mortgage in their sole name and pay the other heirs for their shares of the equity. When heirs cannot agree, a partition action — a court proceeding that forces a division of jointly held property — is the legal remedy, though partition of an encumbered property adds additional complexity to the process.
When the Mortgage Balance Exceeds the Property’s Value
An heir who inherits property with a mortgage balance that exceeds the property’s current market value — commonly called an underwater or upside-down property — faces a difficult decision. Keeping the property means continuing to pay a loan larger than what the property is worth. Selling the property at fair market value may not generate enough proceeds to fully pay off the mortgage. And allowing the lender to foreclose means losing the property while potentially creating tax consequences for the estate.
For an heir who accepted the succession under benefit of inventory, the personal financial risk of inheriting underwater property is limited — the heir’s liability cannot exceed the value of what they inherited. An heir who accepted unconditionally may have greater exposure. In either case, an heir facing an underwater property should consult with the succession attorney about their options before taking any action. A short sale — selling the property for less than the outstanding mortgage balance with the lender’s consent — may be negotiable and can be a cleaner exit than waiting for foreclosure.
Renouncing the succession is an option for an heir who concludes that the inherited property’s liabilities outweigh its benefits. A renunciation — which must be express and in writing, filed with the court in the succession proceeding — treats the renouncing heir as if they predeceased the decedent. The heir receives nothing from the estate, including no interest in the mortgaged property, and avoids any risk associated with the property. Before renouncing, the heir should consult with both a succession attorney and a tax advisor: renunciation has tax consequences, and the heir should understand the full picture before making an irrevocable decision.