Inherited a House With a Mortgage in Colorado: Your Complete Guide

What Happens to the Mortgage When You Inherit

When someone dies with an outstanding mortgage, the debt does not simply disappear. Here's what happens:

The Mortgage Stays With the Property

A mortgage is secured by the property itself. When the borrower dies, the debt becomes an obligation of the estate, but the lien remains attached to the property. This means:

• Payments must continue or the lender can foreclose
• The mortgage cannot be separated from the property
• If you inherit the property, you inherit it subject to the mortgage

Estate vs. Personal Liability

The estate is responsible for the mortgage debt. However, heirs who inherit the property are not automatically personally liable for the mortgage. This distinction is crucial:

• If you don't formally assume: The lender can foreclose on the property but cannot pursue you personally for any deficiency (the difference between the sale price and the loan balance).
• If you formally assume: You become personally responsible for the debt, but you also gain full rights to modify, refinance, or negotiate the loan.

Reverse Mortgages

If the deceased had a reverse mortgage (HECM), special rules apply. The loan typically becomes due upon the borrower's death, and heirs usually have 6 months (with possible extensions) to pay off the loan or sell the property. The amount owed is usually limited to the property's value.

Due-on-Sale Clause Protections

Most mortgages include a "due-on-sale" clause that allows the lender to demand full payment if the property is transferred to a new owner. However, federal law provides important protections for heirs.

The Garn-St. Germain Act

The federal Garn-St. Germain Depository Institutions Act of 1982 (12 U.S.C. § 1701j-3) prohibits lenders from enforcing due-on-sale clauses in certain situations, including:

• Transfer by inheritance to a relative of the borrower
• Transfer to a surviving joint tenant
• Transfer to a spouse or child of the borrower
• Transfer resulting from divorce or separation

What This Means for You

As an heir inheriting property from a relative, the lender cannot:

• Accelerate the loan and demand immediate full payment
• Refuse to accept your payments
• Charge a fee for the transfer
• Increase the interest rate due to the transfer

Your Options for the Property

When you inherit a house with a mortgage, you have several options:

Option 1: Keep the Property and Assume the Mortgage

If you want to keep the home (to live in or rent), you can formally assume the mortgage and continue making payments. This makes sense when:

• The mortgage rate is favorable compared to current rates
• You want to live in the property
• You can afford the payments
• The property has significant equity

Option 2: Sell the Property

The most common choice is to sell the property. The mortgage is paid off from sale proceeds, and remaining equity goes to the estate for distribution to heirs. This makes sense when:

• You don't want to keep the property
• You can't afford the payments
• Multiple heirs need to split the value
• The property needs significant repairs

Option 3: Rent the Property

You can keep the property and rent it out. Rental income can cover the mortgage payment while building equity. Consider:

• You become a landlord with all associated responsibilities
• Property management can be hired but cuts into profits
• Rental income must cover all expenses to be worthwhile

Option 4: Refinance

You can refinance the mortgage into your own name, potentially accessing equity or changing the terms. This requires qualifying for a new loan based on your own credit and income.

How to Assume the Mortgage

If you decide to keep the property and assume the mortgage, here's the process:

Step 1: Contact the Lender

Notify the mortgage servicer of the borrower's death and your intention to assume the loan. You'll need to provide:

• Death certificate
• Proof of your relationship to the deceased
• Documentation showing you inherited the property (will, court order, etc.)

Step 2: Request Assumption Documentation

Ask the lender for their assumption process and required documents. Under the CFPB's mortgage servicing rules (Regulation X), servicers must have policies to work with confirmed successors in interest (heirs).

Step 3: Decide on Formal Assumption

You have two choices:

• Informal assumption: Continue making payments without formal assumption. The lender cannot refuse your payments, but you won't have full account access or ability to modify the loan.
• Formal assumption: Complete the lender's assumption process to become the borrower of record. This gives you full account access and the ability to modify or refinance later, but also makes you personally liable.

Step 4: Complete Required Documentation

For formal assumption, expect to provide:

• Assumption agreement
• Proof of insurance in your name
• Property tax information
• Escrow account transfer documents

Selling to Pay Off the Mortgage

If you decide to sell the inherited property, the mortgage will be paid off at closing. Here's what to expect:

How the Process Works

1. List or market the property through an agent, FSBO, or direct sale
2. Receive and accept an offer
3. Title company orders a payoff statement from the lender
4. At closing, the mortgage is paid off from proceeds first
5. Remaining equity goes to the estate for distribution

What If There's Not Enough Equity?

If the property sells for less than the mortgage balance, see the section on underwater properties below. This is called being "underwater" or having "negative equity."

Benefits of a Quick Sale

Selling quickly after inheritance can be advantageous:

• Stops ongoing mortgage payments from depleting estate funds
• Eliminates property insurance, tax, and maintenance costs
• Minimizes risk of property deterioration
• Allows faster distribution to heirs

Handling Underwater Properties

An "underwater" property is one where the mortgage balance exceeds the property's market value. This situation requires careful consideration.

Understanding Your Position

The critical fact to remember: you inherited the property, not the debt.Unless you formally assume the mortgage, you are not personally liable for the deficiency (the difference between the loan balance and the property value).

Option 1: Wait and Continue Payments

If the market is likely to recover and you can afford payments, holding the property until values rise may make sense. Colorado real estate has historically appreciated over time.

Option 2: Short Sale

A short sale is when the lender agrees to accept less than the full loan balance. The process involves:

1. Documenting the hardship/situation to the lender
2. Listing the property at market value
3. Submitting an offer for lender approval
4. Lender agrees to accept proceeds as payment in full

Short sales take longer (3-6 months often) but allow a clean exit without foreclosure.

Option 3: Deed-in-Lieu of Foreclosure

You can offer to transfer the property to the lender in exchange for release from the debt. This avoids foreclosure proceedings but requires lender agreement.

Option 4: Walk Away (Strategic Default)

If the property is significantly underwater and you haven't formally assumed the mortgage, you may choose to stop making payments and let the property go to foreclosure. Consider:

• You typically won't be personally liable for the deficiency
• The foreclosure won't affect your credit (you weren't the borrower)
• There may be tax implications for forgiven debt
• Consult an attorney before making this decision

First Steps to Take

When you learn you've inherited a property with a mortgage, take these steps:

1. Locate the Mortgage Documents

Find the original mortgage note, deed of trust, and recent statements. This information tells you:

• Current loan balance
• Interest rate
• Monthly payment amount
• Lender/servicer contact information

2. Contact the Mortgage Servicer

Notify the lender of the death. Ask about:

• Current loan balance and status
• Process for heirs to continue payments
• Assumption procedures
• Any grace period for payments

3. Ensure Payments Continue

Make sure mortgage payments continue to avoid late fees and foreclosure proceedings. The estate or heirs should cover payments until a decision is made.

4. Verify Insurance

Ensure homeowner's insurance remains active. The lender requires insurance, and you need protection if you're continuing payments.

5. Get a Property Valuation

Order an appraisal or comparative market analysis to understand the property's current value relative to the mortgage balance.

6. Consult Professionals

Consider consulting with:

• Probate attorney for estate matters
• Tax professional for stepped-up basis and tax implications
• Real estate agent or buyer if considering sale
• Financial advisor for long-term implications