You may find yourself in the situation of a mortgage note inheritance due to a death of someone that had previously purchased their house or property using a seller financing loan. Whether the mortgage note inheritance was from your Mother, Father or distant Aunt Mary, you should be familiar with your responsibilities and options available to you to protect the property.
Mortgage Note Inheritance
A mortgage note is similar to a conventional bank mortgage, except the house or property was purchased using seller financing rather then from a bank or mortgage company. The seller financing loan may span 10-30 years and in this case the borrower (Aunt Mary, the mortgagee) unfortunately passed away prior to the mortgage note being fully paid off. The mortgage note is two documents: the promissory note and the property mortgage. The property mortgage secures the payment of the promissory note by a lien on the property that was purchased. The promissory note normally includes terms related to what happens if the mortgagee dies prior to paying off the loan. The lender of the mortgage note has several options when this occurs, including the right to immediate loan repayment. If the estate of Aunt Mary is unable to fully repay the promissory note, the lender can begin the process of loan foreclosure by selling the property for repayment.
Inheriting A Mortgage Note
Aunt Mary decided to bequeath her property to her inheritors. Along with receiving physical possession of the property was included the corresponding promissory note and property mortgage. Depending upon the terms of the promissory note, in case of the death of mortgagee, the lender may be obligated to provide a period of time to the inheritor(s) to decide what to do with the property. The inheritor(s) may decide to keep or sell the property to satisfy the promissory note, payment of estate taxes, etc. If the inheritor(s) is a relative of Aunt Mary, and decides to reside in the property, often he/she can assume the existing promissory note and continue making monthly payments without the risk of loan foreclosure. Note that no one is legally bound or obligated to accept inherited property and its obligations.
Mortgage Note Payment Obligations
Settling an estate inheritance takes time. The estate executor is required to continue making the monthly promissory note payments until the final estate settlement. This is to avoid the risk of the lender beginning loan foreclosure. Also the estate executor is required by law to inform creditors of the estate what will be done to satisfy pending estate debts including the property mortgage. If the mortgage property will NOT be directly assigned to one of the inheritors, and there are no other estate funds to pay off the promissory note, the lender normally begins the foreclosure process to recover payment.
Most promissory notes (also Contracts for Deed, Land Trusts, Trust Deeds) contain what is called a “Due On Sale Clause”. This gives the lender of the loan an option to “call in” the loan if the property is transferred to another party (e.g., death of the borrower, Aunt Mary). This is also often referred to as “accelerating” the loan payment. If the lender chooses to exercise this clause, the executor of the estate will need to refinance at current market rates and terms to pay off the promissory note or risk foreclosure and lost of the property.
Garn-St. Germaine Act
The Garn-St. Germaine Act prevents the lender of the promissory note to “call in” the loan under a variety of circumstances, even if the promissory note has a Due On Sale Clause. For example, the surviving spouse of Aunt Mary, Uncle Fred would not be obligated to payoff the promissory note. Similarly if the niece of Aunt Mary were to inherit and occupy the property, she would not be obligated to payoff the promissory note. Finally if the sister of Aunt Mary, Aunt Jane who also was living in the property with the right of survivorship, she also would not be obligated to payoff the promissory note. In all instances the inheritor of the property is responsible to continue making payments on the promissory note.
The process of a mortgage note inheritance requires attention to detail by the executor of the estate. Where multiple persons may be involved in the inheritance of a property with a mortgage note, it may not be practical to keep the property “in the family”. More likely the executor of the estate will choose to pay off the promissory note to the lender and then sell the property on the open market with the proceeds distributed to the inheritors. If you find yourself in this situation, we suggest you seek professional legal advise.
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