Inheriting a home with a mortgage: due-on-sale limits and your rights as a successor in interest

When a borrower dies, or a home passes to a spouse in a divorce, the new owner often ends up holding a house with someone else's mortgage on it. Two sets of federal rules apply. A 1982 statute limits when a lender can call the loan due because of the transfer.¹ Under amendments the CFPB published in 2016, Regulation X and Regulation Z also give the new owner, once the servicer confirms them, many of the same servicing rights as a borrower.²³⁸ This page walks through both, quoting the rules.

Can the lender call the loan due because the home was transferred?

Federal law defines a due-on-sale clause as a provision that lets the lender "declare due and payable sums secured by the lender's security instrument if all or any part of the property, or an interest therein, ... is sold or transferred without the lender's prior written consent."¹

The Garn-St Germain Depository Institutions Act of 1982, codified at 12 U.S.C. 1701j-3, lists transfers where the lender "may not exercise its option pursuant to a due-on-sale clause." The list applies to a loan "secured by a lien on residential real property containing less than five dwelling units," including a cooperative unit or a residential manufactured home.¹ The listed transfers that matter most to heirs and divorcing spouses are:¹

"a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety"
"a transfer to a relative resulting from the death of a borrower"
"a transfer where the spouse or children of the borrower become an owner of the property"
"a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property"
"a transfer 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"

The federal regulation that implements this list, 12 CFR 191.5(b), applies it to a loan on a home occupied or to be occupied by the borrower. For a transfer to a relative after a death, to a spouse or children, or in a divorce, the person receiving the home must occupy or plan to occupy it, and for a living trust the borrower must remain the beneficiary and occupant. Reverse mortgages are excluded.⁹

This limit is about the transfer itself. It does not stop a lender from acting on other terms of the loan contract, and it does not by itself make the new owner liable for the debt.¹⁷

Who counts as a successor in interest

Regulation X, the rule under the Real Estate Settlement Procedures Act that governs mortgage servicing, uses the same five kinds of transfer to define a "successor in interest." It is "a person to whom an ownership interest in a property securing a mortgage loan subject to this subpart is transferred from a borrower," provided the transfer is one of the five listed above.² Regulation Z, under the Truth in Lending Act, has a matching definition for a dwelling that secures a closed-end consumer credit transaction.³

Once the servicer has "confirmed the successor in interest's identity and ownership interest" in the property, the person becomes a "confirmed successor in interest."²³

How to get confirmed by the servicer

Servicers covered by these rules must have policies and procedures to do three things. "Upon receiving notice of the death of a borrower or of any transfer of the property," they must "promptly facilitate communication with any potential or confirmed successors in interest." When they learn a potential successor exists, they must promptly tell that person what documents they "reasonably require" and how to make a written request under 12 CFR 1024.36(i). When the documents arrive, they must "promptly make a confirmation determination" and tell the person the result.⁵ These procedure duties are in section 1024.38. Sections 1024.38 through 1024.41 do not apply to reverse mortgage transactions or to certain Farm Credit System lenders, and small servicers are exempt from most of them. The written-request route below, under section 1024.36, is not part of that exemption.⁴

You can also start the process yourself. If you send the servicer a written request that "indicates that the person may be a successor in interest," gives "the name of the transferor borrower," and includes information that identifies the loan, the servicer must answer in writing. The answer must describe "the documents the servicer reasonably requires to confirm the person's identity and ownership interest in the property" and give contact information, including a telephone number.⁶ For that request, the servicer has to treat you as a borrower under the information-request rules.⁶ Those rules require a written acknowledgment within five business days, and for most requests a response within 30 business days, which the servicer can extend once by 15 business days if it tells you in writing before the 30 days end.⁶ If the servicer has set a specific address for information requests, send it there, because the duty to respond applies "only for requests received at the established address."⁶

Before confirmation, the servicer only has to tell you what documents it needs. If you asked for other information too, it must tell you that you "may resubmit any request for information once confirmed."⁶

What changes once you are confirmed

Regulation X says: "A confirmed successor in interest shall be considered a borrower for purposes of § 1024.17 and this subpart."⁴ That subpart is the mortgage servicing rules, and section 1024.17 covers escrow accounts.⁴ Under this rule, the servicer's duties in the servicing subpart, such as responding to notices of error and requests for information and the loss mitigation procedures, extend to a confirmed successor. Those loss mitigation procedures apply only when the home is a borrower's principal residence, and small servicers are exempt from most of sections 1024.38 through 1024.41.⁴

Regulation Z also counts a confirmed successor in interest as a "consumer" for these sections: the rules on adjustable-rate notices (1026.20(c) through (e)), payoff statements (1026.36(c)), notice of a loan's sale or transfer (1026.39) and periodic statements (1026.41).³

Being a successor is not the same as owing the debt

A servicer may send a confirmed successor who is not liable on the loan a written notice with an acknowledgment form. The notice must explain that, "Unless the successor in interest assumes the mortgage loan obligation under State law, the successor in interest is not liable for the mortgage debt and cannot be required to use the successor in interest's assets to pay the mortgage debt." It must also say that the lender keeps "a security interest in the property and a right to foreclose on the property, when permitted by law and authorized under the mortgage loan contract."⁷

The acknowledgment form matters. If the servicer uses this notice, it does not have to send you certain disclosures, such as escrow account notices and adjustable-rate change notices, until you either assume the loan under state law or return the signed acknowledgment.⁷⁸ There is "no time limit to return the acknowledgment," but the servicer "will not begin sending such notices and communications" until you do.⁷ Whether or not you sign it, you can still send notices of error, requests for information and requests for a payoff statement.⁷

What these rules do not settle

Whether you take over personal liability for the loan depends on whether you assume it under state law. Regulation X refers to assuming the obligation "under State law."⁷ The federal rules quoted here also do not decide who inherits the property. For reverse mortgages, see our page on reverse mortgage non-borrowing spouse protections.⁴

Questions

Do I have to refinance to keep an inherited home?

The federal due-on-sale limit stops the lender from calling the loan due because of a listed transfer, such as a transfer to a relative after a borrower's death, for a home the borrower occupied, where the person receiving it occupies or will occupy it (see the conditions above).¹⁹ Whether you refinance, assume the loan or keep paying it is a separate question that the federal statute does not answer.

Can the servicer refuse to talk to me because I am not on the loan?

Unless it is a small servicer, once it knows of a borrower's death or a transfer, the servicer must have procedures to "promptly facilitate communication" with potential or confirmed successors in interest.⁵⁴ Any servicer must answer a written request about your status under section 1024.36(i). That written answer must list the documents it needs.⁶

Where can I complain if the servicer does not follow these rules?

Our notice of error and request for information guide covers the steps, including the CFPB complaint route.