Inheriting a House with a Mortgage in California: What You Need to Know

Inheriting a home in California can be a significant financial asset, but if the property comes with a mortgage, it also carries certain responsibilities. Whether you plan to keep, sell, or rent the home, understanding your options and obligations is essential. Here’s a comprehensive guide to what happens when you inherit a house with a mortgage in California.

Does the Mortgage Automatically Transfer to the Heir?

In California, when a homeowner passes away and a mortgaged home is inherited, the mortgage does not simply disappear. Instead, the heir must decide how to handle the existing loan. The federal Garn-St. Germain Depository Institutions Act allows certain heirs to assume the mortgage without triggering a due-on-sale clause, which means the lender cannot demand full repayment immediately.

Key Options for an Heir Inheriting a Home with a Mortgage

1. Assume the Mortgage and Keep the Home

• The heir may continue making payments on the existing mortgage.

• Lenders usually allow a surviving spouse, child, or other qualified heir to assume the loan.

• The heir should notify the lender as soon as possible and provide proof of inheritance (such as a trust document or probate order).

2. Refinance the Mortgage

• If the heir does not qualify to assume the existing mortgage, refinancing in their own name may be an option.

• This allows for potential lower interest rates or better loan terms.

• Creditworthiness and income will be key factors in securing a refinance.

3. Sell the Home

• If the mortgage payments are unaffordable, selling the home may be the best option.

• The sale proceeds can be used to pay off the outstanding mortgage balance.

• If the home’s value is less than the mortgage owed, a short sale may be necessary, requiring lender approval.

4. Rent the Property

• If selling is not desirable, the home can be rented out to generate income to cover the mortgage payments.

• The heir must ensure the rental income exceeds the mortgage, taxes, and maintenance costs.

5. Walk Away or Let the Home Go into Foreclosure

• If the mortgage is unaffordable and no other options are viable, the heir may choose not to claim the property.

• If mortgage payments are not made, the lender will initiate foreclosure proceedings.

• In most cases, heirs are not personally liable for the mortgage debt unless they have co-signed the loan.

Property Tax Considerations for an Inherited Home

California’s Proposition 19 affects how inherited properties are taxed:

• If the heir moves into the home as their primary residence, they may qualify for a lower property tax rate under the parent-child exclusion (subject to limits).

• If the heir rents or sells the home, the property is reassessed at current market value, potentially increasing property taxes.

Legal and Financial Considerations

• Notify the Lender Promptly: Heirs should contact the mortgage lender to discuss options and avoid late fees or foreclosure risks.

• Check for Mortgage Protection Insurance: Some homeowners have insurance policies that pay off the mortgage upon death.

• Consult an Estate Planning Attorney: Legal guidance ensures compliance with California probate laws and helps navigate complex financial decisions.

Final Thoughts

Inheriting a house with a mortgage in California presents both opportunities and challenges. Whether you choose to assume, refinance, sell, or rent the home, understanding your financial obligations is crucial. If you’re unsure about the best course of action, consulting a real estate attorney or financial advisor can help you make informed decisions and protect your inheritance.

Contact the top-rated California trust and probate attorneys Moravec, Varga & Mooney today to schedule a telephonic consultation. Have questions, call (626) 460-1763 or email LV@MoravecsLaw.com.

Southern California Probate Lawyer Serving all counties in California, including Los Angeles, Riverside, San Bernardino, Sacramento, Santa Cruz & Beyond.