Let’s pretend, for example, that Lauren and her two sisters “inherited” their grandmother’s house because her grandmother specified in the will that they would become the new owners. Unfortunately, as the family was coping with the aftermath of a death and going through the probate process, the bank seized the home and sold it at auction.
Now, Lauren is wondering how this could have happened. Unfortunately, experts say this is more common than you might think, although there are ways to prevent it from happening.
How can you lose an inherited home?
For Lauren and her sisters, it probably seemed like their grandmother’s will was enough to ensure the home would become theirs. But that’s simply not the case.
“It comes down to one basic point that surprises a lot of families,” Raul Gastesi, founding partner of Gastesi Lopez Mestre & Cobiella, told Moneywise. “You inherit the house subject to whatever is owed against it.”
Gastesi explained that many people die with a mortgage, and when this happens, someone must continue making payments.
“A mortgage is a lien on the property itself, not a personal IOU from your grandmother,” Gastesi said. “Her death doesn’t erase that lien, and it doesn’t pay off the loan. The lender’s right to foreclose follows the house into your hands, and inheriting the property does not, by itself, give you any right to stop paying.”
Unfortunately, Gastesi said this scenario happens often, usually because the family is grieving or arguing about what happens to property, or because no one is sure who is in charge. The family ends up not making payments, so the loan goes into default, and the bank can foreclose.
Gastesi also said that reverse mortgages can cause a similar issue. “Many older homeowners have one, and the entire balance becomes due and payable when the last borrower dies or permanently leaves the home,” he explained. If heirs don’t act within the allowable time, which could be six months or so, the lender can foreclose.
Finally, he warned that other claims against the property also survive a death, including property taxes, HOA fees or code enforcement liens. If a creditor decides to foreclose because of these unpaid debts, heirs could lose the house if they don’t act.
