When the main borrower on the mortgage dies, who can do what?

In this episode, John Ross and Lisa Shoalmire discuss a recent case of Lisa’s where the widow’s name was not on the recently deceased loan, and the troubles she and others like her are likely to face.

Episode Transcript
John
Welcome to Aging Insight everybody. This is your host, John Ross here, live in the studio with Lisa Shoalmire. And we are your elder law experts in the community.
Lisa
So today, John, I want to tell you and the listeners about something that happened this week. And that is, I got a phone call from a lady who I had worked with her when her husband passed away probably 2 or 3 years ago, seems like. And her husband passed away after a long battle with cancer. And he had... In the end, we had done some estate planning documents that provided for her, and made sure that the home and the retirements, and all of that were going to her. And everything after we finished up the paperwork, couple of years ago, everything had been going great. It all went very smoothly. My lady was able to grieve for her husband but she was not bogged down in a bunch of business and estate issues.
Lisa
But, then something came up this week. And what happened is this lady and her husband, they had a home and they had a mortgage on that home, as well as a little second mortgage on the home. They had done some improvements a few years back and so after he passed away and the home went to her. She, herself, was not on the mortgage, just her husband had been on the mortgage. Now, we, during the estate process, we certainly advised the mortgage company of her husband’s death and there was some correspondence back and forth about all of that. Seemed all good. And so, closed up the estate and since then the wife had been paying the mortgage and the second mortgage, and what she had been doing was writing the total on one check because...
John
All right, so the total due for both mortgages on one check?
Lisa
Right, 'cause it was with the same company. She'd been sending in that check in a timely basis every month and so no problems. Well, last month she sent in that check and whoever processed it, instead of splitting the payment properly, based on the account numbers on the memo line of the check, they simply posted the entire check to the primary mortgage, which, of course you know how computers are, if there's not a payment placed on to the secondary then all the sudden alert, alert, alert!
John
Oh yeah, you default.
Lisa
Yeah. She gets this letter saying she's late and she's like, "Well, I'm not late." And she checks her bank account and the check has been cashed. And so she calls the mortgage lender and you know what, John?
John
What's that?
Lisa
They wouldn't talk to her.
John
That doesn't surprise me at all.
Lisa
[chuckle] So they would not talk to her. Now, of course, her check's already been cashed and they've been cashing it for the last two plus years with no problems and they would not talk to her. They saw once again in their computers that her husband had passed away. They now wanted additional paperwork again and she was just trying to fix the problem with the appropriate application of funds that she had already sent in, that they had already cashed. And it turned into a big, rigmarole and stress on this lady, who she thought everything was just peachy. We had to get back involved and work with the mortgage company and it just brings up that, that's an issue that happens quite frequently where a homeowner or property holder dies and there's a mortgage still on the property. Whether that be homestead or commercial or whatever it might be, but perhaps the spouse is not also on the mortgage, they're not a co-borrower, just as in this case. Or, of course, if it's a single person who passes away and they leave their home to their children or other heirs, of course those children are not going to be co-borrowers on the mortgage, so it becomes a sticky issue.
John
Well, and there's a website out there called avvo.com, A-V-V-O dot com, where people can ask questions of lawyers. And I actually had somebody reach out and ask me a question about a week ago, and the question was, "My mom passed away and left me her home, which had a mortgage on it. And I've been making the mortgage payments for the last year and they've been taking them, but they won't talk to me. [chuckle] What can I do?"
Lisa
Right? What can I do and...
John
And the thing is that when we think about mortgages, related to people as they get older, historically by the point people reached retirement age the vast majority of people had their homes paid off and frankly just in my own personal experience in the last say 10 or 15 years, I can remember... I typically ask people, "Do you own a home?" "Yes." "Is it paid off?" "Yes." But that 'yes' answer is becoming 'no' more and more frequently.
Lisa
Well, that is certainly true because in the last 20 years in this business we are seeing seniors, more and more of them still having mortgages on their home. Or they may have paid off a mortgage but then went and refinanced and pulled equity out of their home, oftentimes to assist their children, who lost jobs due to the downturn in the economy or to help pay for grandchildren's college education. There's all sorts of reasons that a senior may have re-mortgaged a home or still have a mortgage.
John
Yeah and the things is that the actual number of homeowners over the age of 65 has remained unchanged. As a group, the same number of people own homes over the age of 65, but the number of people that have a mortgage on those homes after 65 has actually tripled, just in the last 10 years. And not only has the number of people over the age of 65 with a mortgage tripled but the amount of that mortgage has also gone up significantly, where the median mortgage debt for somebody over 65 is $80,000.
Lisa
Wow. That's a...
John
Which is quite a bit. Probably the scariest statistic in all of this would be the amount of people over 75, and the number of people over 75, there's 21% of that group still has a mortgage on their property.
Lisa
So one out of five people over 75 still have a mortgage.
John
Yeah, and this can be a big issue, I mean this is not necessarily to our main topic for today, but that mortgage can have a lot of problems while you're still alive. That's cutting into what is probably otherwise are relatively fixed income.
Lisa
Right, because once you typically want to retire most people between a social security payment, maybe some pension if they're lucky enough to have that or a disbursement, some disbursements from their IRA's, but you usually you're not dramatically increasing your income in retirement. [chuckle]
John
Right. And the other thing in all of these is, one thing that we see on a pretty regular basis is people who have used the equity in their home. They had the big house that they raised the big family in, but then in their... At 70, 75 something like that, they sell that house, converting it to cash and either downsize significantly, in which case they get to pocket the rest of it or they don't even buy another house but move in to an independent living environment or something like that. Where now they have a big lump sum of cash they can use for un-reimbursed medical expenses and those sort of things, really ways to improve the quality of their life and the quality of the care that they get through those years. But if there are mortgage debts on these properties that's gonna reduce their ability.
Lisa
Right. I mean if you have an 80,000 mortgage and you sell your property for 140,000 there's still... You're not clearing as much as you would if you had already paid it off.
John
That's exactly right. There's lots of issues there but I guess the biggest thing in all of this is, that as if we're going to keep increasing the number of older people that have debts on real estate, have mortgages, then the next thing we're gonna end up with is a lot of people having to figure out what to do with that mortgage after that person has died.
Lisa
Yes, and those people having to figure that out might be a surviving spouse, might be adult children, might be, there might be trust and things involved. But it has to be dealt with because of course that mortgage is... That's a secured lender on that home and so the real estate secures the loan. And so before anything can really happen to that home and that real estate to be transferred, the mortgage has to be addressed. So John, I think we'll take a break and we'll comeback and talk about this some more.
Lisa
Welcome back everyone to Aging Insight this is Lisa Shoalmire here in the studio, coming down to the bottom of the hour before our news break. And John today we're talking about what to do with the mortgage if there is real estate that a deceased person was the main borrower on, so we wanna make sure that... You've got some advice on that, what's going so...
John
Yeah, that's the whole thing because we are saying this more and more as time rolls on and it's an increasingly weird issue. Now, I guess the first thing is to understand, here's we get the last little segment here is, to understand how debts in general work. I bet somebody ask me almost every week, they'll say, my wife, my husband, my parents whoever they were they died, they owe money...
Lisa
Yeah, is that gonna be my responsibility?
John
Yeah, am I gonna be responsible...
Lisa
Personally responsible.
John
Personally responsible for their debts and the short answer to that is "No". The estate is responsible for that sort of that thing.
Lisa
Right. In a mortgage, the estate would be responsible for that debt but of course the debt is tied to the real estate so the lender is somewhat protected, to where of the estate can't deal with the debt, or can't make other arrangements that... Ultimately there is the potential for foreclosure, but that's way down the road. I guess, what I wanted to kinda... First question I usually get when there's a mortgage or home involved is seeing across from the heirs or the person who lost your loved one, and the first question they ask is "Well, can I just keep paying the mortgage? And we just won't let them know that the mortgage owner, the mortgage borrower, has passed away?" John is that a great idea?
John
The thing is, is that they're gonna figure this sort of thing out at some point in time.
Lisa
Right. When someone passes away the funeral home and that medical providers and all that, they notify social security, they notify the Texas Department of Vital Statistics... I mean there are people that are already notified. Now, will Bank of America or Citibank or Washington Mutual Mortgage get a notification? Not initially, no.
John
No, but there are some places that do often times get notice throughout this process. For example, if mom or dad also had a credit card maybe you're not worried about the credit cards so you cancel that and they go ahead and cancel that but you know it's a credit card and so... They also somewhere in this, they pop up something with one of the three credit reporting agencies. And that credit reporting agency now lists the person as deceased. And when you owe money to somebody like a mortgage company, they will occasionally take a look at your credit report to make sure you're still... Wow, they're concerned about getting paid. They also wanna make sure that you don't have a... You're not racking up a whole bunch of other debts and things out there.
Lisa
Right. Well, and you know...
John
There it is.
Lisa
Well, and John after the 2008 bank meltdown related to mortgages, the mortgage companies are pulling those credit reports from time to time just to make sure their credit files are up to date. It's not like if they just keep receiving the payment that they're never going to check on it again.
John
Right. Yeah, these things are gonna, it's gonna come up. So the short answer is, is that you can't just let this go indefinitely. Especially when we're talking about mortgages that are gonna have five or 10 years of stuff going on. There's just no way to figure it out, so that...
Lisa
Yeah. You may not wanna deal with the mortgage company, certainly right off the bat. When someone passes away, you've got to deal with those initial arrangements and just all those things of the loss of that loved one. And certainly calling mortgage lender is not the number one thing on your list. But once you get past those first little bit of arrangements and things, you do need to. Once you got those death certificates in, if you're the spouse that are living in that home, you need to figure out, is there gonna have to be a probate on the situation? You need to talk to an attorney to figure out where you are, but you're just gonna have to tighten your belt and dial that 1-800 number at some point.
John
Yeah, no, there's definitely gonna be things to do. Now, what you do and how you do it can actually have some repercussions depending on the way this process rolls out. And so, there's certainly... And there may be things where you don't wanna keep paying that thing. You want it to just go away.
Lisa
[chuckle] Right, yeah.
John
I've certainly had that in the past. So, we're gonna talk about through the last half of the program, we're gonna talk about several of these options and just go through, do you probate? Do you not? What if you wanna sell it, what if you don't want to sell it and you wanna keep paying it? All those options. Stick around.
Lisa
Alright. Welcome back everybody. And we've got the next half of our program. So, if anyone has a question, 903-793-1071 is the answer line number. How do you like that John?
John
That's right. I like that.
Lisa
And today we're talking about dealing with a mortgage on property where the deceased was the mortgage borrower. And before the break, basically I hope what you got out of it is, you can't just ignore it. You can't just keep paying and assume that everything's gonna be hunky dory.
John
Right. And that's despite the fact they they will probably take your payments.
Lisa
Oh, a bank will take your payment on the loan no matter who makes it?
John
Yeah, sure enough, yeah. But, that eventually, even if you're able to do that for a time, you're eventually going to run into...
Lisa
You're gonna be found out, that's right.
John
Yeah, you're gonna run into a problem. And the problem is if you haven't got it all fixed when that problem rears its ugly head, the process could end up moving faster than you can move in response.
Lisa
Right. So, don't ignore it. Don't just assume that keeping the payments up will make it all good. So, from there John...
John
As far as that goes, don't even assume that you're the heir to the property.
Lisa
Right. A lot of times, with blended families, second marriages, all kind, they've heard that, "Oh the house is the surviving spouse's." But that may not be true.
John
Right. In which case maybe you're paying mortgage on a house that does not belong to you or it belongs to other people. I've had a situation where there were three kids. Two of which had deceased or predeceased the mortgage holder and so, the third one...
Lisa
The third child assumed!
John
The third child assumed, well my brother and sister are dead. Well, everything just came to me.
Lisa
Nope.
John
But, not realizing that their deceased brothers had children. And they each took a share. And yeah, making payments on somebody else's stuff not maybe be necessarily what you wanna be doing. And so that goes to the point of, you've got to start by figuring this thing out. The first thing is to understand how this asset the home itself, how did this pass? Did it pass automatically at death? For example, if we're talking about a piece of property in Arkansas that's owned by husband and wife and both names are on the deed.
Lisa
Right, tendency by the entirety.
John
Yeah, then that probably did in fact pass to the surviving spouse. On the other hand, if the deed says that they own it as tenants in common or if it's a Texas property, even if it is in the husband and wife's name, that doesn't mean that it automatically passes to the surviving spouse. It might, it might not. So the first thing is whether or not this is a probate transfer or a nonprobate transfer.
Lisa
Well. And John, we talked about life estates a few weeks ago on the program. And we talked about how that is a way to pass property through a non-probate means.
John
Sure.
Lisa
Where the senior does a deed and say, "I give the property to Mary and Jeff, my children. But during my lifetime I keep the right to live there. To mortgage it. I'm responsible for the mortgage, I could rent it out." They still have all the ownership rights. Well, that's a nonprobate transfer. But just because the house passes into the name of the children at the death of the senior, that has no impact whatsoever on the mortgage.
John
Right. Right.
Lisa
And I think that's another thing for listeners to make sure they divide is, ownership and mortgage obligation are two different things.
John
Right. And the second thing is to understand that when there are debts related to a person that has died, these debts all have certain classifications. Some debts are stronger than other debts. For example, a mortgage, is what's called a secured debt. That means that the bank, they have a right to the property. They have a lien on the property. So, even if there's other debts, they still get that house first. Whereas something like a credit card or something, is what's called an unsecured debt. But what if, for example, what if the house is upside down?
Lisa
Yes. And that's not unusual these days John. That a house was, mortgage was taken out when the real estate values were higher. The market has fallen. The equity and the house frankly they owe more than the house is worth. If you're an heir, you may not wanna continue to pay the mortgage, cause' all you're doing is... You're not gaining anything.
John
Right. And the question is, why would you pay the mortgage on something that's upside down? That doesn't necessarily make any sense unless you just had to have it. But, typically, the kids don't just have to have it. But maybe there's some other assets. Maybe there's bank accounts. Maybe there's IRA's. Maybe there's other assets out there. The question becomes, if the house is worth $100,000 and there's a $120,000 note, what happens to that extra $20,000? The bank clearly has a right to the property itself. But whether or not the client, they have a claim over and above that to any of the other assets, can actually depend on what happens during the probate process. When you go through the probate process, the creditors, in this case, the mortgage holder, they've got certain options. They can choose for example, to just take the house. In which case any extra goes away.
Lisa
Sure. And it doesn't suck up any of the other assets of the estate.
John
Right. Alternatively though, they can choose a whole different thing. Where not only do they get the house, but they also can then attach their other 20,000, in my little scenario, to other assets like the cars or the personal property or the bank accounts and things like that. But, there's a lot of process that goes into all of this.
Lisa
Right. That goes back John to, if you're an heir or and executor or something in regards to property that may still have a mortgage on it, you need to get good advice. I know John, a lot of times in our disclaimer here in our show, we say, "Everyone's situation is different". Don't act on the general advice that is given here. And this is certainly that example, because there's all kinds of issues that come into play here. Was there a surviving spouse? How was the deed held on the property? Separate and apart from any mortgage obligations that can even be, if they're disabled children or people that are of the mortgage holder that are living in the house. That can be an issue. The proper probate, whether this is a probate or a nonprobate transfer. And if... And the proper way to deal with the creditors to minimize any effect on the estate as a whole. That's all a series of questions and facts that are going to determine how you individually as the executor or an heir should address a mortgage.
John
Right, and as far as all of that goes this is not, when you've got debts out there, whether it's mortgage or other type of debts, this is not necessarily the time to say, "Oh, well. I wanna try to do this the easiest way possible." You wanna do this the most economical way. But the economical way is often times the one where you end up having to pay the least amount to the creditors. I had a case years ago where we had a woman who had died. She'd left behind a four year old child who was now an orphan. The deceased mother had tens, hundreds of thousands of dollars of debts. Real estate debts. Mortgage debts. Credit card debts. JC Penney's card. Everything you can think of, she owed. And she did have a little bit of assets. And those little bit of assets would have been all that this four year old was ever going to get from her mother. And, at least, in my personal opinion, I felt the four year old could probably do more with it over her lifetime than Discover-card or Mastercard or somebody like that.
Lisa
Yeah. It was definitely more beneficial to this child.
John
And we could have for example gone through a simple probate process where we end up just paying all these creditors off...
Lisa
Or some cents on the dollar.
John
Or some cents on the dollar, or we could create, what is, and I didn't make this up, but the Texas legislature, in this case it was a Texas case, but the Texas legislature has provided an extremely, overly complicated way to address these situations where these creditors have to jump through hoop after hoop after hoop, and if they mess up at any one time they don't get paid.
Lisa
Yeah, they're out, and so sometimes when I'm visiting with a client and they're addressing this... The Internet is a wonderful thing, and lots of people do research on well... And they come in and they say, "Well I wanna do an affidavit of heirship on this, but if there's debt owed on the property, if there's some issues with the solvency of the estate, then that may not be the way to go. And I can certainly, I'm glad to explain that, and I can certainly show you how in the end the heirs and beneficiaries get much more benefit out of some of these more, like you said John, more complicated processes. But I love putting creditors through hoops about, do they sign the right documents and file them in a timely manner? And if they mess up on the rules, that frankly they're so good at making themselves against us borrowers. [chuckle] I'm glad to be like, they're out of bounds, they're out of the game, done. [chuckle]
John
Yeah, you wanna make sure you're doing the process right. Now the next thing is related to do you want to sell it? And if you do, how are you gonna sell it, what's your timeframes on all of that? Or do you just let it go, and let it get foreclosed, and things like that? And we're gonna talk about some of those last little things in our last segment. So stick around, we'll be right back.
John
Welcome back to Aging Insights everybody, this is your host John Ross. Here in our last segment with Lisa Shoalmire we're talking about what do you do with that silly mortgage after the person dies?
Lisa
Well, and John, I do wanna give some comfort to our surviving spouses out there, if their spouse that has deceased is the mortgage holder, there is some law in the books that banks cannot just call the mortgage.
John
Right, if there's a surviving spouse. This came around, wasn't this part of the whole mortgage collapse thing or did it even predate that?
Lisa
It actually predated, it came in the 1980's, probably with savings and loans and all that. But in the 1980's they came up with this protections for surviving spouses where the mortgage still is due, you're not out of the mortgage, but many mortgages have a due on sale clause that if the mortgage owner, the mortgage borrower dies then there's provisions, or the house changes ownership, that the home mortgage is due at that time. And so they did carve out an exception if the mortgage borrower died and left a surviving spouse, and the real estate was being used as homestead, so they do have to allow the surviving spouse to assume the mortgage, and not charge fees in that assumption.
John
Oh wow.
Lisa
Which I think's a big deal.
John
Yeah, that's a good one.
Lisa
'Cause you know lots of banks will charge a fee and so if you don't know that they're not supposed to charge in that situation. Or of course, a surviving spouse if they can get better terms, the term rates are low, they may want to refinance and get away from that mortgage... But they had the time to do that. So for our surviving spouses there's even more options in dealing with the mortgage, you're not gonna get put out of your home in the next 30 days following the death of the mortgage owner, but you do need to take action steps.
John
Right. And let me point out something here, what we're talking about is your right to continue with the mortgage. This does not change the underlying ownership of the property. For example, if you're a husband and wife in Texas and it's a second marriage, each spouse has a child from their first marriage, and the husband dies, yes, the wife has the right to use and occupy the home. Even if we're talking a house that's community property, they bought it together, they mortgage together, but if that husband died in test state, if he died without a will, his one half of that house passes to his child, not to the surviving spouse.
Lisa
Right, the surviving spouse still has her half, and the right to live there.
John
And so what Lisa's talking about is, yes, you can assume that mortgage, you can continue to make these payments, but there's somebody else out there that does in fact have an underlying ownership interest. And while you can assume the existing mortgage, you probably would not be able to refinance it.
Lisa
Right at that point, because we have other owners involved. And I ran into that situation just a couple of weeks ago John, with a lady who the will said that everything went to her. But she never probated it and he had children from a prior marriage and when she went to get a home improvement loan, when they were going to the papers the title company says, "Hey, wait we need all the kids, his kids to sign off." And it imploded. [chuckle]
John
And I actually have one right now in the last couple of weeks where the person is right on top of it. Spouse has just died, they're addressing this, it's the same circumstance with the children from outside the marriage, but we're gonna be able to address these issues on the front end and get the stuff taken care of. I didn't want to people think, "Oh well, Lisa just said there's a law, and it goes to the surviving spouse." No, the right to continue the mortgage is protected. But that doesn't change the underlying ownership and none of that has anything to do with kids.
Lisa
Right. Mortgage on the property, gotta deal with it if you're a surviving spouse, there are some additional protections, some additional timelines that you have to find your option that's gonna work for you. But John, let's talk about if we wanted to sell, if the beneficiaries, or the estate wanted to sell the property.
John
I'd say that's probably the most common as is, you know, nobody's gonna live in it. The kids have long since moved off, or they have their own houses or whatever the deal is. They don't want mom and dad's house and so they're just going to sell it. Once again we have an initial issue of determination of ownership. Because when they go around to selling it and a buyer is identified, and the buyer's gonna get title insurance, and the title company is going to say "Well, this house is owned by Mama Jones." And the family is going to say, "Well, yes but Mama Jones is dead." And the title company is gonna say, "Well, that doesn't change the fact that we still need her signature unless you can show us who her heirs are". And the kids they show up and they say, "Well we're the three kids".
Lisa
Yeah, here we are, we're all in agreement this is all three of us. And the title company still says, "Not good enough."
John
Not good enough because we're not just going to take your word for it, you might have a fourth brother out there that you don't like and you're not telling us about. So we're not just going to take you, we want something official. And this oftentimes is if with, outside of any good planning on the front end, this is oftentimes where you're gonna have to end up having to go through that probate process.
Lisa
And I ran into this not too long ago, and a lot of things have changed. I have a lot of people come to me and say, "Well, we didn't have to do any type of probate process when Uncle Bill died or when mom passed away." But things have changed John, laws change.
John
Law change and as things that used to be relatively smooth and easy, and you see this in every day. There's lots of people there are perfectly willing to do a deal on a handshake, there's a lot of trust and confidence. But over the years litigious lawyers have... The plaintiffs law firms out there have tried to sue everybody they can, for every little misstep that anybody ever makes. And this has made people who are in the business of making sure everything is done right, like a title company, somewhat nervous.
Lisa
Yes, well, and the other thing is I had a conversation with a title company owner. I was frustrated because I wanted to use a more simplified process to pass some real estate to three kids that were all in agreement a happy, happy family...
John
Easy-breezy...
Lisa
Yeah, and I wanted to use a more simplified process and in fact I did so. And then when it came time, the kids went to sell the house and the simplified probate process, although sanctioned and approved by the statutes of the State of Texas, were not good enough for the title insurer. So ultimately we had to go back and redo some paperwork and go through in a more elaborate probate process, so we could get the paperwork that the title company was comfortable with and willing to complete the sale. And so that cost us a delay in time to complete the sale, made me frankly look like I didn't know what I was doing because I thought, "Hey, we can do this abbreviated efficient probate process and forget about the more elaborate one." But in the end, we had to go through the elaborate anyway.
John
Yeah, nothing legally wrong with what you did, it's just that the title company, they're gun-shy and sometimes they can almost make up their own rules. We've seen banks make up their own rules in the past.
Lisa
And I was frustrated, so I was talking to the title company about this and I said, "Hey, I did what the State of Texas allows, I don't work for the title company so if you want extra papers well then you go get them." And their response was, "Well, we just won't write the policy." And what they explained was that with the banking crash in 2008, the banking regulations have had a large impact on title companies and how they sell real estate, and if any of the real estates gonna have a loan involved. And so, what may have worked 15 years ago for Edna and Uncle Bob may not work today.
John
Yeah, it's just probably not gonna cut it anymore. [laughter]
John
Well, listen, I think, we certainly covered a lot of issues but probably the big thing is, is regardless you gonna wanna to get some advice in any situation like this, but particularly when there's debts on real estate. Don't just think you can let that stuff go. There's good ways to do it, there's bad ways to do it, ultimately, you're gonna need some advice. And of course thanks to everybody who listens out there. If you're a Cable One subscriber, you can click over to Channel 10 and catch us on Aging Insight TV...
Lisa
KLFI.
John
And the new Aging Insight magazine be coming out shortly, so look for that. We'll see you next time.

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