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What happens to a mortgage when the owner dies

what happens to a mortgage when the owner dies
  • What happens to his ownership interest in the property, and
  • What happens to the mortgage.

    What Happens To The Mortgage

    The bank loan to purchase the house is secured by a mortgage lien on the real estate. The borrower pledged the real estate as collateral for the loan to purchase the house. The borrower’s promise to pay back the loan is called the promissory note.

    All mortgage promissory notes include a “due-on-sale clause.” This contract provision authorizes a lender (the bank), at its option, to call in the loan, i.e. declare immediately due and payable sums secured by the mortgage lien, if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent.

    For example, if an owner of mortgaged property dies and his interest is transferred to his heir, the loan’s due-on-sale clause allows the bank to demand that

    the entire loan balance be immediately paid. If it is not paid, then the borrower has breached the contract and the bank can foreclose. However, the Garn – St. Germain Act created many exceptions to this general rule.

    The Garn St. Germain Act

    The Garn – St. Germain Depository Institutions Act. a federal law passed in 1982, stops banks from foreclosing on residential real property, containing less than five dwelling units, because of a transfer :

    • By devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
  • To a relative resulting from the death of a borrower;
  • Where the spouse or children of the borrower become an owner of the property;
  • Into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.

    Category: Credit

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