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Losing a loved one is a difficult time and understanding what happens when you inherit a house with a mortgage can help you cope with the responsibilities ahead.
When someone passes away, their property and the remaining mortgage payments are handed over to the beneficiary. Sometimes there is life insurance or assets to cover the remaining mortgage, but if not, the responsibility of those payments becomes yours.
However, if you have inherited property with a mortgage, you have the option to sell the house, rent it out, take out a new mortgage in your name and take over the property payments or use we buy any house services, just make sure you pick the right company – we buy any house reviews.
On a property mortgage, there is an agreed-upon amount that is paid on a monthly basis and your estate (the total value of your assets) is collateral for this loan.
If someone passes away, the monthly payments still have to be made on the property and an executor will be responsible for carrying out the wishes of the deceased laid out in their will, and making sure their assets are distributed as intended.
Nothing can be done with the property until probate is complete which can be a lengthy process. Probate is the process whereby the executors settle the debts of the deceased, before handing over the inheritance.
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Apply for Probate or Letter of Administration
The first thing you should do after someone has passed away is to determine if they have a will. Executors are named in the will and can apply for probate. An executor could be a solicitor, friend, or family member.
What is probate? Probate is the judicial process where a will is proven in a court of law. If the probate is granted, the executor can go ahead and sort out the assets of the deceased. They determine the value of the assets, pay remaining debts, and organize the inheritances. This is not a quick process and can take anywhere up to a year to complete.
Without a will, known as ‘dying intestate’; the next of kin will need to apply for a ‘grant of admission’ with the courts. If they are successful, they’ll receive ‘letters of administration’ to prove their rights to the estate. However, in these cases, the law determines what is inherited.
Regardless if there is a will, all outstanding bills, and taxes owed on the property are paid off first.
Contact the Mortgage Lender
You should contact the mortgage lender as soon as possible. They need to know that the homeowner has passed away and that you have inherited the property and mortgage. They can then take the next steps, with probate, to deal with the assets and debts of the deceased.
Lenders have to deal with cases like this quite often and tend to be empathetic and understanding. Speak to them about holding off on repayments until the estate has been confirmed and the probate is complete.
If you inherit a house, you have to pay inheritance tax on the deceased estate. You will not have to pay inheritance tax if the value of the estate is below £325,000., or if the deceased has left everything above this amount as your inheritance. The standard inheritance tax rate in the UK is 40%.
The estate is used to make the inheritance tax payment, organized by the executor. The executor will use the deceased’s remaining funds or sell their assets to raise funds for this payment. In some states, a surviving spouse or partner can inherit part of the deceased’s property – even if they don’t have a legal right to it. In this situation, the person inheriting the property receives a inheritance tax gift from the deceased.
If a mortgage is used to raise the funds for the inheritance tax payment, the beneficiary will have to sell equity in the property. In this case, the beneficiary can choose to pay the inheritance tax using their own savings.
The Estate Pays The Balance
When someone has passed away, the value of their estate is determined and is first used to pay off any outstanding debts, before being passed over to the beneficiaries.
If the value of the estate covers the remaining mortgage on the property, then you won’t have to make any repayments and can live rent and bond free! However, this must be confirmed in the will.
If there is a remaining mortgage on the property, these repayments fall on the beneficiary. If you’ve inherited property and want to take ownership, then it will be determined if you are able to make payments on the mortgage.
If the will does not state that the estate should cover the property mortgage, and you are unable to afford the repayments, then you may have to sell the house and use the proceeds from the sale to pay off the remaining mortgage. Any balance left after the mortgage and debt repayments will go to you as the beneficiary.
Mortgage Payments are Inherited
If you have inherited a property with a mortgage, you have also inherited the mortgage payments. If the mortgage cannot be covered by the estate, you will have to take over all payments on the property, including the household bills.
Selling the Property
You have the option to sell the property if you are unable to make payments on the mortgage. Whatever the reasons, the property is yours to sell.
The sale of the property will cover the outstanding debt and inheritance tax. The balance will be paid out to you, which you could invest in another property.
Rent It Out
If you have taken on the mortgage payments for the property, then you are welcome to use the home as you wish. Renting it out can help boost your income and pay off the mortgage quicker.
In this case, you will have to organize a buy-to-let mortgage so that any profits retained from the property are declared for tax purposes.
Initially, you will have some time to resolve outstanding debts as the mortgage is likely put on hold until the grant of admission has been finalized, but if the property mortgage has not been met, you could face repossession of the property.
To avoid this, you can sell assets to settle the mortgage, refinance the property and continue making payments yourself, sell the home quickly, use your savings or personal assets, or check the deceased life insurance terms.
Property With a Joint Mortgage
A joint mortgage means that you share ownership of the property with another person. This is commonly a spouse. Here you have a few choices.
- In a joint tenancy situation, the other owner will inherit the property and the debts and payments. A spouse can reapply for a new mortgage.
- If the tenancy is in common agreement, the portion owned by the deceased will go to their beneficiary. The property ownership can be transferred to the tenant or be sold to pay off debts.
- Without a will, there will be a legal process to determine the rights to the property.
Inheriting a Property With a Sibling and Avoiding a Forced Sale
So, you’re inheriting a house with your sibling. You may have different views and your sibling may want to sell the house while you want to keep it in the family. But, can your sibling force the sale? No.
All shareholders have to give consent to sell the property.
With these inheritance situations, things can be a little more complicated. If the house is vacant, it’s common to sell the home and split the proceeds. There is also the option to rent out the property and share the income.
Regardless of the disagreement, no one person can force a sale. The portion of their shares can be sold, but you are not likely to find someone willing to purchase a portion of a house.
The sibling who is in favour of selling will have to go through the courts to get a court order to sell the house. They would have to have very good reasons for this to be granted. The other sibling will then have a chance to dispute the sale.
Sharing ownership is a peaceful and fair resolution and can be done in two ways. You can become joint tenants, where you have equal rights and if one sibling passes, ownership is taken by the remaining sibling.
The other option is to become tenants in common, where each sibling owns a defined portion of the home. Otherwise, if there is a sale, the proceeds are split by the percentage owned.
The process can be long and complicated, and there are a variety of factors that go into inheriting a house with a mortgage.
Is there a will, how much money is owed, is it jointly-owned, are you inheriting a house with siblings, and will you rent or will you sell?. You need to make an informed decision if you inherit a property.
Contact the mortgage lender to see if they can hold the repayments until the estate is finalized so that you have the time you need to make the right move.