It seems like a common sense idea that the home of a person would pass to his or her heirs upon death. Even with complex estates, most people take that for granted. However, there are some reasons that real estate wouldn’t automatically pass to heirs, and mortgages are one of them.
In January, an Ability to Repay rule went into effect regarding mortgages. The rule essentially required banks to determine whether a person had the ability to repay a mortgage before they are granted or added to any loan so that banks are not granting mortgages to individuals who are unlikely to have the means to repay them.
A strict interpretation of the law had unintended consequences for heirs, however. In Nevada and other states, individuals were losing their homes because banks could not transfer outstanding mortgages to them following the death of a loved one due to the Ability to Repay rule.
The Consumer Financial Protection Bureau recently issues an interpretation of the new rule that makes it easier for heirs to retain ownership of homes. The Ability to Repay rule isn’t automatically triggered when an heir is added to a estate, but that doesn’t mean a bank is obligated to transfer mortgages to heirs. Heirs must continue to work with banks to arrange repayment and mortgage terms, and banks can still deny unqualified heirs based on other lending practices.
Estate planning ahead of time reduces some of the issues that come up in estate administration, including the transferring of a mortgage. If heirs are better prepared for such a financial issue, it’s more likely they’ll be able to keep a home in the family.
Source: US Finance Post, “CFPB Clarifies Mortgage Rule to Help Surviving Family Members Take Over Loans” Christine Layton, Jul. 08, 2014