Inheriting a house with a mortgage: What you need to know

To help ease some of the burden for you, we’ll explain how the process of inheriting a home works, how to assume a mortgage when you inherit a home, whether you’ll get to keep the same interest rate, how to deal with a home that’s passed down to multiple heirs, and more.

Inheriting a home through probate vs. a trust

When you inherit a home, the process by which you get it depends on your loved one’s estate plan. One of the most common ways assets pass from one person to another after death is through probate. It’s a legal, court-supervised process through which someone’s assets are distributed after their death.

The probate process is overseen by an estate executor (sometimes called a personal representative). This person may be specifically named in the will, or, if a person died without a will, it could be a family member, friend, or another person the court appoints.

Probate can be a lengthy and expensive process, meaning it could take months or years for you to legally inherit the home. Additionally, it’s possible the house may be sold to pay off creditors if the decedent had debt when they passed away. 

It’s important to note that during the probate process, it’s the job of the estate executor or personal representative to continue making on-time mortgage payments to ensure the home doesn’t go into foreclosure.

Another process through which someone can inherit a home is through a trust. A trust allows the home to bypass probate entirely. Instead, depending on the terms of the trust, the home can immediately transfer to the beneficiary when the original owner passes away. In other words, this avoids the time and financial cost of probate.

Though many people think of trusts as an estate planning tool for the wealthy, they can be a valuable estate planning tool for just about anyone. And in the case of passing down a house to a loved one, they can help avoid the administrative cost and headache that probate requires.

Learn more: Why the first step in your estate planning process shouldn’t be crafting a will.

Assuming a mortgage after inheriting a home

When you inherit a home, there’s a decent chance you’ll also have to take on the mortgage that comes with it. After all, about 70% of homeowners under age 65 and 34% of seniors still have a mortgage on their home.

Assuming a mortgage after someone dies doesn’t require the same process as applying for a mortgage on your own. Thanks to the Garn-St. Germain Depository Institutions Act of 1982, when you inherit a home, you have the right to “stay and pay,” meaning you can assume the original borrower’s mortgage without having to qualify for a new loan. 

After your loved one who owned the home has died, you’ll have to contact their mortgage lender to let them know. As long as you provide information showing you’re inheriting the home, the lender is required to provide information about the loan and how to qualify as a “successor in interest.”

Once you assume your loved one’s loan, you’ll have a few options. First, you can continue making payments on the existing loan. This is often the best option if the original loan has favorable loan terms, including the mortgage rate and monthly payment. 

However, depending on your creditworthiness and the current interest rate environment, you may potentially be able to get a lower interest rate and/or monthly payment by refinancing the loan. Keep in mind this comes with added expenses, including closing costs, that aren’t required for simply assuming the existing mortgage.

Learn more: Compare refi mortgage rates.

What if the borrower had mortgage protection insurance?

If you inherit a home with a mortgage, it’s important to check if your loved one has mortgage protection insurance (MPI). 

MPI isn’t the same as private mortgage insurance (PMI), which you’re typically required to have when you buy a home with a down payment of less than 20%. Instead, this type of policy is similar to life insurance in that the policy pays out when the insured passes away. However, unlike traditional life insurance, MPI is specifically designed to pay off the policyholder’s mortgage balance.

MPI isn’t required, so there’s no guarantee your loved one has this type of policy. However, it’s always worth checking. If there is an MPI policy in place, the mortgage will be fully paid off, and you’ll only be on the hook for continuing expenses such as property taxes, homeowners insurance, and HOA fees.

How to decide whether to keep or sell an inherited home

When you inherit a home, you’ll have to decide whether or not to keep it. This can be an emotional decision. After all, you could be inheriting the family home you grew up in or a home that’s near and dear to your heart. However, it’s also a financial decision.

Learn more: Selling a home is expensive too—Homeowners spend $55,000 on average to sell their properties.

If you decide to keep the home, either to live in it or rent it out, make sure to run the numbers. You should be prepared to take on the mortgage payment, as well as any other ongoing expenses, including taxes, insurance, HOA fees, and maintenance. You’ll have to make sure these expenses fit within your budget if you hope to keep the home.

On the other hand, you could decide to sell the home—this is easiest if the remaining mortgage is less than the value of the home. This option may be best if you either can’t afford the mortgage or you already have a home and don’t need this one.

The good news is that when you inherit a home, you get a stepped-up basis, meaning your basis in the home is its value at the time of the owner’s death. Therefore, you’ll be less likely to pay capital gains taxes. However, you will have to use the proceeds of the home sale to pay off the mortgage and other selling expenses, including closing costs and real estate agent commissions. The amount left over after these expenses is yours to keep as your inheritance.

Whether you decide to keep or sell the home, it may be a good idea to get an appraisal on it. This will help you determine how much you may be able to get for the home if you sell it and can help you determine your basis in the home.

Learn more: Home prices almost never go down.

What to do if there are multiple heirs to the home

In some cases, there could be multiple heirs to a home. For example, someone might leave their home to all of their children rather than just one. Some co-heirs may agree on what to do with the home. Unfortunately, that’s not always the case, and having multiple heirs can create disagreements.

First, if all heirs want to either keep and co-own the home or sell the home, you can easily figure out how to proceed. If one heir wants to keep the home while the other(s) don’t, the person who wants to keep it can buy out the other parties. 

Keep in mind that unless you have the cash on hand to buy the other heirs out of their share of the home, you’ll likely need to take out a loan. There are probate and estate loans specifically designed for this type of situation. You could also consider alternative financing options like home equity loans, cash-out refinance loans, and more.

Things can get really difficult if co-heirs disagree on what to do with the home. You generally can’t sell the house without your co-heirs’ permission. However, if an agreement can’t be reached, the court may step in and require the sale of the home.

Understanding a due-on-sale clause

A due-on-sale clause is a provision in many mortgage agreements that allows a lender to demand full repayment of a loan when the borrower sells or transfers the title of the property to someone else. This clause prevents a homeowner from, say, selling their home but not using the money from the sale to pay off their mortgage.

When you inherit a home with a mortgage, you usually won’t have to worry about a due-on-sale clause. The provision of the Garn-St. Germain Depository Institutions Act, which gives you the right to “stay and pay” when you inherit a home, prevents lenders from calling on a due-on-sale clause in this situation.

Inheriting with a reverse or underwater mortgage

Certain extenuating circumstances, including a reverse mortgage or an underwater mortgage, can complicate the process of inheriting a home. You’ll have to proceed a bit differently in these cases.

Reverse mortgage

A reverse mortgage is a way for senior homeowners—specifically those 62 and older—to borrow from their existing home equity. It works the opposite of a traditional mortgage in that, instead of paying into their mortgage each month, they receive money, either as monthly payments, a lump sum, or a line of credit. And unlike with a traditional mortgage, the balance gets progressively larger instead of smaller.

A reverse mortgage is designed to be repaid when the borrower either moves out of the home, sells the home, or passes away. If you inherit a home with a reverse mortgage, it’s still possible for you to keep the home. However, you’ll have to repay the loan balance within 30 days. You may be able to get a loan to do this.

If you decide to sell your home, you can simply use the money from the sale to pay off the loan. If the home is worth more than the loan balance, you’ll have the remaining amount to keep as an inheritance. If the mortgage is underwater—meaning the house is worth less than you use—you can pay off the reverse mortgage by selling the house for at least 95% of its appraised value. The difference is covered by a special type of mortgage insurance that’s included in the loan agreement.

Underwater mortgage

An underwater mortgage is one where the loan amount is higher than the home’s value. Unfortunately, this makes it a bit more difficult to sell a home since the sale proceeds won’t be high enough to repay the loan in full. If this is your situation, you’ll have two primary options:

• Short sale: A short sale is when your lender agrees to let you sell a home for less than you owe. Depending on your state, you may or may not be responsible for the difference. Getting a written waiver of deficiency from your lender ahead of time allows you to sell the house without being responsible for the difference between the loan amount and home value. If you want to go this route, you may decide to contact a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor for assistance.
• Deed in lieu of foreclosure: A deed in lieu of foreclosure is when you turn over ownership of a home to the lender before they start the foreclosure process. It’s a viable option to avoid a foreclosure when it’s inevitable. But as with a short sale, some states may allow a lender to come after you for the difference between the home’s value and the loan balance. If that applies to you, it can be worth asking for a written waiver of deficiency similar to what we mentioned in the bullet point above. 

How inheriting a home with a mortgage could impact your taxes

When you inherit a home, you’ll get a stepped-up cost basis based on its value at the time of the owner’s death. So, while you technically will be subject to taxes on any gains, you may not have any if you sell the home right away. 

Additionally, the IRS offers a capital gains tax exclusion on up to the first $250,000 of capital gains—or $500,000 of capital gains, for a married couple—when you sell your home. This exclusion is available if you’ve both owned and lived in the home for at least two of the past five years. Therefore, if you choose to live in the home you inherit and sell it after a few years, you could also potentially save on taxes that way.

Keep in mind that if you sell the home right after inheriting it, without first living in it and owning it for at least two years, you won’t be eligible for this tax exclusion.

Are mortgage payments tax deductible?

Inheriting a home with a mortgage could also technically reduce your tax burden. The interest on the mortgage is tax-deductible, but you’ll have to itemize your deductions to take advantage of this tax savings. But note the standard deduction for 2024 is $14,600 for single filers and $29,200 for those married filing jointly, so depending on your situation you may not actually come out ahead by itemizing. 

The takeaway

Navigating the estate process can be confusing and emotional, and it’s often even more complex when you’re inheriting a valuable asset like a home. In many cases, you can take ownership of your inherited home and assume the mortgage rather quickly. In other cases where the estate requires probate or there are multiple heirs, the situation can be more complex.

Whether you decide to keep the home you inherit or sell it, it’s important to understand how (and when) you’ll take ownership of the home, how to assume the mortgage, what your tax implications will be, and more.

Frequently asked questions

Should I refinance the mortgage on a house I inherited?

When you inherit a home with a mortgage, it may be worth it to refinance the loan if you can save money over the course of the loan. For example, if you can get a lower interest rate and/or monthly payment, it may be worth it. However, consider how long you plan to own the home and run the numbers to make sure there will actually be financial savings.

Also, if your loved one secured a mortgage when interest rates were in the ~3% range, it might be a better option just to assume the existing loan. 

How quickly can I sell an inherited house?

The speed at which you can sell an inherited house depends on how it passes to you. If you inherit the house through probate, you won’t be able to sell it until the probate process has completed. This process usually takes months, but could take years for a very complex estate. On the other hand, if you inherit the property via a trust, you may be able to sell it immediately.

When should I consider refusing an inherited house?

You might decide to refuse an inherited house—this process is known as disclaiming the inheritance—if the owner left it jointly to you and another heir and you think the home should go solely to the other beneficiary. You may also decide to disclaim the inheritance if you feel it’s more trouble than it’s worth, whether financially or otherwise. For example, perhaps the house has an underwater mortgage and you’d prefer to avoid the trouble of selling it.