You can bequeath a mortgaged house to any beneficiary, but being sure that they will be able to keep it is another matter. Financial and legal problems can rob your beneficiary of their inherited house. Take the following precautions if you want your loved one to own and keep your mortgaged property:
Ensure They Can Afford the Payments
The first thing is to ensure that your beloved beneficiary will afford the mortgage payments. This is because when they receive the property, they also inherit the mortgage payments. Therefore, they will face a foreclosure (just as you would) if they default on the payments. For this reason, it doesn't make sense to leave a house to a beneficiary you are sure cannot afford the payments.
Consider an example of an estranged son who is unemployed and doesn't have the wherewithal to make the repayments. If you must leave the house to such a person, it's also helpful to help them with the mortgage payments if you want them to keep the house. For example, you can set up a trust fund for the estranged son so they can use the proceeds for the loan repayments. If there are other costs associated with the property's ownership, such as liens, you should have enough funds in your estate to cover them.
Choose a Responsible Executor
Choose a responsible executor, especially when it comes to finances. This is because the executor will be responsible for paying off your estate's debts, including the mortgage. If the executor is financially responsible, they may misappropriate the funds or just fail to pay the mortgage as needed. That would be dangerous because your estate's obligation to pay its mortgage doesn't end with your death. The lender can easily initiate a foreclosure proceeding if the executor fails to make the payments.
Leave Them an Appropriate Property
Next, you have to ensure that the lender cannot enforce a "due-on-sale" clause on the property. A "due-on-sale" clause allows a lender to demand instant payment of a mortgage in its entirety if a property changes its ownership, for example, if it is sold. Your loved one may lose the property if the lender enforces such a clause and they don't have the resources to clear the mortgage.
Fortunately, there are a few exceptions that prevent a lender from enforcing a due-on-sale clause. Ensure your property meets these conditions if you want your beneficiary to keep the house. For example, the due-on-sale clause will not apply if the beneficiary is a relative.
As you can see, you need to be really careful when bequeathing a mortgaged house to a loved one. Otherwise, you will only be setting up your beneficiary to legal problems. Talk to an estate planning lawyer like Lisa Cappolella Attorney at Law.