Dealing With the Banks: Mortgages and San Diego Probate Administration
Mortgages and Probate Administration
While an estate is being administered in San Diego, trustees and executors often have to address real estate that was owned by the decedent. In decades past, these homes were more often than not free of mortgages and clear of any debt. With today’s difficult economy, however, many more home loans are still in existence when the owner of the property passes. How does this impact the distribution of property during the estate administration process?
The following are possible outcomes for real estate that is subject to mortgages:
- The terms of your will dictate that the mortgage be paid out of the estate assets. Generally speaking, property passing to a beneficiary or heir passes to the recipient subject to the mortgage. The estate is no longer liable for the balance. If the beneficiary or heir does not pay the loan or make other arrangements, the bank’s remedy is to foreclose and take back the property.
- The terms of your trust dictate that the mortgage is paid off out of the trust assets. Similar to property in a will, a property that was held in trust prior to a loved one’s death is subject to the terms of the trust instrument. If the trust dictates that the mortgage is paid off with trust funds, the property will pass to the beneficiary without the mortgage.
- The house passes to your beneficiaries subject to the mortgage, and the beneficiaries refinance the loan. If the beneficiaries can qualify for a new loan, they can refinance the loan on the property. An added bonus is that it is possible that the new loan will have better terms than the previous loan.
- The house passes to your beneficiaries subject to the mortgage, and the beneficiaries take over the loan. In some cases, federal law allows for the transfer of the loan to a relative or heir when you die. In these circumstances, your beneficiaries or heirs just continue to pay the loan as the decedent did prior to his passing. The terms of the loan would remain unchanged.
- The beneficiaries seek a short sale arrangement with the lender or let it foreclose. If the property is underwater, the beneficiaries or heirs may choose to walk away from the property. A short sale may be the a better option since the bank would have no further recourse against the estate, such as when there is a deficiency between the sales price and the amount that remains on the loan. While unlikely, it is possible that, with a foreclosure, the bank could look to the estate for any deficiency.
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