Knowing what will happen to your home or real estate properties after you pass is an important part of proper estate planning. However, it is an unfortunate fact that many elderly people face challenges paying their mortgages. This can add to the already daunting legal challenges that come with planning an estate, and sometimes properties our pass to inheritors in a will while the property is undergoing foreclosure proceedings. These circumstances raise unique legal issues that must be addressed with the help of a good real estate attorney.
Your Obligations as the Inheritor of a Foreclosed Property
Fortunately, an inheritor is not obligated to pay the mortgage of a property in foreclosure, unless they are a co-signer or they share title of the property. Upon foreclosure, an inheritor has a few options. Ideally, the deceased’s estate will be sufficient enough to cover the remaining mortgage left on the property. But in most cases, the inheritor will either have to assume the mortgage left on a property or sell the property and use the proceeds to satisfy the outstanding mortgage. A lender should inform an inheritor how much money is still owed on the mortgage. If the amount remaining on a mortgage is more than the value of the property being inherited, an inheritor might want to refuse to inherit the home and leave the property to be sold in foreclosure. If the amount left on a mortgage is less than the value of the property, it may be a valuable asset or investment.
There are multiple forms in which property title may be shared. It is important to know how the title is held to understand how the property will be inherited and what steps an inheritor may need to take to property deal with the property and foreclosure issues. Title may be by sole ownership, or shared by a joint tenancy, a tenancy of the entirety, tenancy in common, or ownership in trust.
Transferring of the title from one owner to another takes place in the Probate Court (a court process specifically to deal with estates of deceased persons) at the approval of a judge. A transfer of title from a property owner to a beneficiary may happen under various instruments. Under a will, the title is left to an inheritor or a beneficiary in the deceased’s will. If the property is held in trust, the trust instrument will indicate who gets the property upon the death of the settler, or the trust creator. Transfer on Death Instrument notifies the Recorder of Deeds that there is a specific beneficiary that should inherit the property. It is designed to facilitate quick and efficient transfer of a property – it needs to name a beneficiary and to be recorded.
Who Must Pay?
Estate executors of the deceased are responsible for working with the deceased’s creditors to resolve any debts, including mortgages. A lender’s action is against the original borrower and will not be imposed upon the inheriting party or parties. The estate (or other assets) of the deceased should be liquidated and used to pay off any mortgages left on the property. If there is any money left over after paying off the mortgage, it should be transferred to the inheritors. However, if there are insufficient funds, a mortgage company has the right and the ability to close on a property to satisfy a mortgage. Foreclosure will occur if an inheritor fails to make the timely and complete mortgage payments on a property. During foreclosure, the lender possesses the property and sells it for proceeds of the sale to pay off the outstanding balance owed on the mortgage.
If the mortgage is not paid, the property may be sold at auction. Any time before the foreclosure has been filed, or even once a foreclosure case has been filed, a beneficiary can request a “payoff letter,” meaning they may reinstate the mortgage payments from the mortgage company. However, if an inheritor decides to sell the house, they file a “stay” with the mortgage company. Once a foreclosure case has been filed and the property has been sold, any extra money made from the sale and after paying off the mortgage to the lender is now property of the inheritor.
Due-on-sale clause is an important clause to watch for in a loan contract. A due-on-sale clause states that upon the transfer of property, the mortgage company requires that the entire loan is immediately due, that the property be sold, or that the new owner gets new financing to pay off the old loan. However, there is a notable exception to this rule: the Garn-St. Germain Depository Institutions Act of 1982, a federal law that allows the property transfer without enforcing the due-on-sale clause if the transfer is to a close relative.
The close relative inheritor is permitted to assume the payments of the mortgage and retain ownership of the property if the dwelling unit is less than five units. In other words, even if the inheritor is a close relative, if they are taking ownership of a building that has greater than five units, the lender may still enforce the due-on-sale clause. Additionally, if a non-relative is inheriting the property, the lender must provide a to them a notice of acceleration and give the new owner at least a 30 days’ notice of the requirement to satisfy the accelerated loan.
Know Your Rights in Illinois
In Illinois, there are two categories of inheritance rules: the planned estates and the unplanned states. Planned estates include wills or trusts, where the decedent explicitly explained what should happen to their property upon their death. For a property to be left in a will, the house must be a probate asset, the will must be legally binding, and the estate must be sufficient to satisfy all claims. Under unplanned estates, descendants have not left instructions or wishes about what should happen to their property upon their death. Illinois default rules here are for inheritance by the intestate succession if there is not estate plan.
Intestate succession happens with the house is a probate asset, but there is not will (or the will is invalid), there is not valid Illinois Transfer on Death Instrument, and assets are insufficient to pay claims without selling the house. In an unplanned estate, the transfer will be to the heirs, or closest family members of the deceased.
When inheriting a property in foreclosure, an inheritor has a few options and will not be obligated to take on the burden of an outstanding mortgage. The law offers options for assuming, refinancing, selling, or foreclosing on an inherited property. If you find yourself facing foreclosure on a property you inherited, call M&A Law Firm today.