• Tom RuBane

What happens to my house in probate if the mortgage isn't paid off?

A friend recently contacted me for advice about what would happen to his dad's house if his dad passed away and the mortgage was not paid off. This was a concern because my friend's dad was able to qualify for a VA loan but my friend and his brother would not be able to qualify on such favorable terms, if they wanted to keep the house.

The concern, of course, is about the Due on Sale clause that has become standard in most modern mortgages. (Sometimes the mortgage will have an Acceleration clause instead of a Due on Sale clause, but the effect is the same.) The Due on Sale clause allows the mortgage holder to require the mortgage to be paid off completely when the property changes hands. It turns out, though, that there are circumstances where the Due on Sale clause cannot be enforced, and a transfer to a family member through probate is one of them.

When Congress passed the Garn-St. Germain Act of 1982, they prohibited mortgage holders from exercising a Due on Sale clause in several circumstances. The most relevant exception to our topic is when the transfer is from a home owner to his or her spouse or children. This includes transfers via probate.

So the good news for my friend was that, if his father passes away and the mortgage is still in effect, he and his brother would be able to assume payments on the mortgage and keep the house, without having to qualify for a new mortgage.

If you have questions about estate planning or probate issues, please get in touch. I would be happy to talk to you.


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