Understanding How Mortgages Are Transferred Between Heirs

Most people envision having their mortgage paid off well before retirement. Yet setbacks can happen and not everyone ends up paying off their mortgage before they retire. Some people pass away before their mortgage is paid off, leaving questions for their heirs on what to do with the property. The Consumer Financial Protection Bureau, or CFPB issued a new rule this summer designed to make it easier for heirs to be added to any outstanding mortgage from the deceased, without triggering the ability to repay rule. The new rule clarification will help surviving family members who inherit the title to a property to take over the deceased one’s mortgage, as well as to be considered for a refinance, in order to keep their home. “Losing a loved one should not mean also losing your home. Today’s interpretive rule makes it clear that when family members inherit property, they can take over the mortgage without jumping through unnecessary hoops,” said CFPB Director Richard

The rule is designed so banks can not profit when a loved one passes away, and so that heirs do not have to go through months of red tape to inherit a deceased loved ones property. Mortgages are generally secured to a specific property and have a note which is the promise to repay the lender, they are regulated differently than personal lending offers which are non collateralize loans. CFPB Director Richard Cordray said “This gives heirs an opportunity to work with the lender to pay off the loan or seek a loan modification.” This also applies to other mortgage transfers, such as living trusts, transfers due to divorce or separation, and to parents children.

This new rule lets the bank or credit union who made the loan recognize the heirs as the new borrower, and the ability to bypass the ability to repay requirements traditionally associated with a mortgage. Basically it allows heirs to seamlessly assume the mortgage. This rule helps to protect the creditor as well as the one receiving the mortgage transfer, by providing a safe harbor for the lender, due to having clearly defined situations to allow one to assume the mortgage without trigger so called ability to repay rules.

The ability to repay rule came about in January 2014, which was a rule designed to protect borrowers from predatory lenders who would make loans to people who did not have the means or ability long term to repay the mortgage. It required lenders to make an informed decision as to weather or not a borrower could repay a mortgage or not. This was a direct answer to the housing crisis when lenders made very irresponsible loans to subprime borrowers who did not have the ability to repay their loans, leading to record foreclosures. The ability to repay rule was to counter the mortgage salespeople and real estate brokers who in the past misled borrowers and falsified loan applications to get mortgages pushed through that the borrowers could not repay. Unfortunately the ability to repay rule began to affect those inheriting property from a loved one, so the new rule from the CFPB aims to remedy this loophole and allow rightful heirs the opportunity to assume the mortgage of their loved ones.

When a person inherits property from a loved one, but there is still an outstanding mortgage on the property, it can have dire consequences to the heir if they cannot add their name to the mortgage. One example being if an heir needs a loan modification they could have been refused under the old rules due to the fact that the heir is not officially named on the mortgage. The same goes for other standard practices such as a refinance. If the mortgage payment is to high, refinancing or modifying their loan are often the only two choices available for the heir to keep the property, but under the old rules this was very difficult for heirs.

In short the new rule:

• The ruling establishes that by act of inheritance, an heir has already acquired the title to the home, so there for adding the heir as a borrower on the original mortgage does not trigger the ability to repay requirements.

• Allows heirs assume the mortgage and to continue to pay the mortgage.

• Allows the heir to obtain account information, pay off the loan, seek a loan modification or a refinance or a reverse mortgage.

• The Consumer Financial Protection Bureau (CFPB) is working to ensure compliance with the new rule by coordinating with other agencies, and working with lenders, consumer advocates, legal aid attorneys, and housing counselors.