Inheriting Real Estate? New Rules Protect You

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You probably have not been lying awake nights worrying that inheriting a home and a mortgage might cause you a big headache. Even if you are lucky enough to inherit, who knew it could cause a big potential problem for you?

The folks at the Consumer Financial Protection Bureau knew. They knew because they created the problem. And now they’ve fixed it.

The bureau inadvertently cooked up the problem at the start of this year when a new mortgage rule that it wrote took effect. The rule made big changes in how mortgage lenders must screen mortgage applicants. Now they must take several steps to make sure you have a good chance of paying back the loan.

The rule was inspired, as you can guess, by careless lending by some companies before the mortgage crash.

Explains DSNews, a mortgage industry publication:

The Ability-to-Repay Rule took effect in January of 2014 and requires lenders to make a good faith effort to ensure that the borrower … actually has the ability to make payments on the loan that they are applying for.

The Ability-to-Repay Rule set off an unintended consequence: If you inherited a home and mortgage and needed to add your name to the mortgage, you had to qualify for borrowing the mortgage loan, just as if you were applying to buy the home.

The Consumerist notes:

[T]here are significant consequences, such as losing the home, when heirs are unable to add their names to the outstanding mortgage of a home that has legally been transferred to them because the Ability-to-Repay rule was triggered by a lender.

You could face foreclosure. Yikes!

Now, a solution

This month, that was fixed. Worry not, if you are in line to inherit property. With the change made this month, you can inherit Grandpa’s home, have your name put on the mortgage and pay away, even if there’s no way you’d actually qualify to borrow the money on your own.

You can even be eligible to apply for a mortgage modification if you can’t make the payments, says the CFPB’s explanation:

“Losing a loved one should not mean also losing your home. Today’s interpretive rule makes it clear that when family members inherit property, they can take over the mortgage without jumping through unnecessary hoops,” said CFPB director Richard Cordray. “This gives heirs an opportunity to work with the lender to pay off the loan or seek a loan modification.”

Others are protected, too

Other types of new owners are now protected, too. If you receive a home through divorce or a legal separation, you’re covered. If your still-living parents give you a home and mortgage (sweet!), you’re covered. Homes and mortgages transferred to a living trust (an estate-planning tool) are exempt, too.

What’s your thinking about all of this rule-making? Has the government gone overboard? Or are the new protections a necessary evil to prevent the kind of excesses that took place in the mortgage boom?

Weigh in with your comments below or at Money Talks News’ Facebook page.

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Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.

  • Joseph Freitas

    Still living parents able to give a house and a loan? Seems like a way to bypass the mortgage vetting process. Abuse could result in more defaults.

  • Tossaway

    My family is in the lending business, using our own money, so it’s been easy for us to work with borrowers. We’ve actually had buyers die. As long as the payments are made, we’re not concerned about who makes them. We do discuss with the heirs how their situation is because we don’t want them saddled with something they don’t need, so if they don’t want it anymore, they can quitclaim it to us (after probate) and not worry about it. If they do want it, we can adjust the payments if needed. Before anyone blames the banks for not doing it, remember, as this article shows, those same rules meant to protect consumers also act as cages around them and the banks. We are using our own money, no outside investors, so we have a lot more freedom.