Individuals who want to get into the business of real estate investing often face the dilemma of how to go about acquiring their first property. For a fortunate few, inheriting a house is one of the most basic ways to begin assembling a real estate investment portfolio. This is true even if the house comes with a mortgage.
Mortgage on Inherited Property; Acceleration Clauses
Usually, the person who inherits a property becomes responsible for paying the mortgage(s) on it. This may seem like a cumbersome string attached to an inheritance. Instead, as in most things in life, it all depends on how you look at the situation; a mortgage on an inherited home can be an easy, ready-made financing tool for many would-be investors. The inheritor does not have to go through the lender’s application process and prove that he or she qualifies for the mortgage.
In a interview with this reporter, Richard Seltzer, an attorney and long-time real estate investor based in Jersey City, New Jersey, explained, “Unless the mortgage has an acceleration clause that is triggered by the death of the owner, the lender is required to continue to accept the monthly payment until the maturity date. So if the maturity date is five years later, then it is a blessing for the person who is inheriting.”
An acceleration clause is a provision in a mortgage loan agreement that allows the lender to demand immediate payment in full of the remaining balance of a mortgage loan on the occurrence of specific events. These events can include the sale of the subject property, missed or chronic late payments, or the refinance of the mortgage loan.
Seltzer indicated that, in his more than 25 years of practice, he has not seen clauses that provide for mortgage acceleration upon the death of the property owner.
“Particularly nowadays with the foreclosure rate being so high, lenders are happy to have someone – perhaps younger, employed, and not burdened by medical bills – who is able to more easily afford the monthly mortgage payments,” Seltzer observed.
“That is why I don’t think that a mortgage on an inherited property is an issue unless the family is in crisis. If it’s a family in crisis, it can’t afford the mortgage,” Seltzer continued. He cautioned that his views are based on the assumptions that the value of the inherited property exceeds the mortgage balance and that a reverse mortgage is not involved (in a reverse mortgage, payment in full is due when the owner dies, sells, or moves).
Inheritances Small and Rare in the U.S.
Inheriting a house is a surprisingly rare occurrence in the United States, given the national homeownership rate of 67.3 percent as of the first quarter of 2009 (although the rate has been trending downward since the third quarter of 2006, as indicated by statistics compiled by the U.S. Census Bureau).
According to the non-profit think tank RAND Corporation, average individuals between the ages of 60 and 70 will have spent about 58 percent of their wealth before they die, with many selling their homes to cover health-related costs. RAND analysts have also estimated that 44 percent of those who own homes at age 70 will sell them before they are 85 years old.
According to a 2003 AARP/Public Policy Institute study, people in the top 20 percent of wealth levels received one quarter of all inheritances reported by 2001 that exceeded $100,000. Moreover, a Federal Reserve analysis of the Survey of Consumer Finances revealed that, in 2004, median inheritances were only about $29,000.
So if those who have been thinking about getting into real estate investment happen to inherit houses that still have a mortgage, they can consider themselves as being among the fortunate few to receive a truly valuable windfall from their loved ones.