What to Do if a Co-Borrower on a Joint Mortgage Dies
A joint mortgage allows two people to share in the burden and benefits of paying a home loan. Each lender and each mortgage agreement will deal with the joint mortgage issues differently. In fact, some states will have different laws than other states. However, for the most part, when a co-borrower on a joint mortgage dies, the mortgage is controlled by the surviving partner.
Surviving Borrower Assume Mortgages
In most cases, the co-borrowers on a mortgage each share the burden of the debt equally. Even if one person's credit was primarily used to secure the loan, there is no real primary borrower and co-borrower on the majority of joint mortgages.
Every mortgage will have note and deed that address death and ownership. You can refer to this section in your loan documents to see what your specific situation will be. You can also arrange to have the death handled in a manner to your liking if you pay attention to this prior to signing the agreement. For example, some loan contracts will say the issue would need to be handled in court. If you and your spouse can agree to a way to settle the issue ahead of time, this can be written into the contract before you sign it.
Loan Goes to Probate Court
In some states, the law will exclude the mortgage from simply passing to the surviving borrower. Instead, the issue will have to be handled in a probate court. This is not like a traditional court room with a jury. Instead, a judge will preside over the events and be asked to decide what is best for the borrower and lender. If the surviving borrower cannot afford to pay the entire mortgage, the judge may request a loan refinance. In some cases, the surviving partner will have to sell the property. The proceeds will go toward paying off the loan, and any remaining funds will have to be distributed as the judge sees fit. For example, if the borrower who has passed away had an estate trust, then a portion of proceeds from the equity may have to go toward the trust.
Using Life Insurance to Pay a Mortgage
If you plan well with your life insurance, you can allow a surviving borrower to make mortgage payments or completely pay off a mortgage with the funds. When you elect life insurance, you should consider the debts you would be leaving behind if you passed away. For most people, the largest debt would be a home that is not yet paid off. Resolving this debt with an insurance payout can leave your survivors with a much smaller burden. You may write your arrangements into a trust agreement with an attorney. For example, even if your estate cannot pay off the loan, you can leave the home and mortgage to your spouse and provide assistance in meeting mortgage payments through the estate you have left behind.