Can a Bank Foreclose on a House in Probate?

Introduction

Mortgage agreements don’t dissolve when the homeowner passes away, and if the decedent’s estate fails to make the mortgage payments the bank has the right to foreclose on the house. Unfortunately, it’s not uncommon to see banks foreclose on a house that’s in probate.

Why Would an Estate Default on a Mortgage During Probate?

Human error is often the cause of foreclosures during probate, as the grieving family members either forget to continue making the monthly mortgage payments or assume that the house is paid off. It’s also difficult to continue making monthly payments when the decedent’s income stream dries up and there aren’t enough liquid assets (bank accounts, savings accounts, cash, etc.) to make the payments on time. In some cases where the family members know that the house is “underwater” (the fair market value is less than the principle mortgage balance), the family may even decide to intentionally let the house go into foreclosure, assuming it’s not worth the hassle.

The Personal Representative’s Duty of Care

Whatever the cause may be, the personal representative who has been appointed by the probate court to manage the decedent’s estate has a fiduciary duty to prudently manage the assets. That means he or she is required to do everything they can to stop a foreclosure using the estate’s other assets, whether that involves liquidating assets to pay the overdue mortgage balance or selling the house. If the personal representative fails to fulfill their duty of care, the court may hold them personally liable for the estate’s losses if any beneficiaries or creditors sue for damages.

That said, it’s not always possible to save the house from foreclosure, especially if the account was already in delinquency before the decedent passed away. Some lenders can be quite aggressive when it comes to foreclosure practices, and unwilling to give the personal representative a reasonable amount of time to settle the debt or sell the house. As long as the personal representative does their best to fulfill their duty of care, they won’t be held liable for the house’s foreclosure.

How to Handle Foreclosure During Probate

While some lenders may be willing to work with the decedent’s immediate family to resolve the foreclosure, most lenders will only work with the court-appointed personal representative. The lender will probably want to see the representative’s letters of appointment (often referred to as “Letters”) to verify their authority to act on behalf of the estate.

If you are the personal representative for the estate, here’s how you should handle an asset in foreclosure during probate:

1. Communicate with the lender in writing
2. Pay the overdue balance with the estate’s liquid assets
3. Request an injunction to provide reasonable time to sell illiquid assets
4. Request an injunction to provide reasonable time to sell the property

Communicate with the Lender in Writing

While your communication with the lender will invariably involve conversations over the phone or in person, you need to document your communication. Start the process by sending a letter to the lender using certified mail with a return receipt request for proof of contact. Attach the decedent’s death certificate along with your letters of appointment to validate your authority. In the letter, request that the lender send you statements to confirm the principle mortgage balance, the overdue payments, and the decedent’s payment history (try to go back at least 6 months prior to the decedent’s passing). It’s also helpful to request a copy of the loan documents to make sure the lender is acting legally within the terms of the agreement.

When you receive the lender’s response, begin by checking for any errors, as catching a mistake by the lender is the easiest way to rectify—or at least postpone—the foreclosure process. If you suspect that the lender is breaking the terms of the agreement, speak with an attorney as soon as possible.

Pay the Overdue Balance with the Estate’s Liquid Assets

The easiest solution to foreclosure is to pay the overdue balance, and the quickest way to do that is with the estate’s liquid assets. “Liquid assets” are assets that can be converted to cash within a few days, and typically include bank accounts, brokerage accounts, certificates of deposit, stocks, bonds, mutual funds, gold, and silver. If the estate has enough liquid assets to pay the overdue balance, liquidate the assets and gather the proceeds into an estate checking account. Write a check to the lender for the overdue amount, plus any administrative fees and foreclosure costs that the lender requires. Mail the payment by certified mail with return receipt requested and retain a copy of the payment for your records. Request that the lender send you proof of cancellation of the foreclosure and proof of payment.

Request an Injunction to Provide Reasonable Time to Sell Illiquid Assets

If the estate doesn’t have enough liquid assets to pay the overdue balance, you may have to sell illiquid assets to pay the debt. Illiquid assets usually include other property, vehicles, and valuable personal possessions like art, jewelry, and collectibles. Check with the lender to see if they’re willing to give you enough time to sell these assets to pay the overdue balance. If the lender is unwilling to halt foreclosure, have your attorney get an injunction from the court to halt foreclosure and give you a reasonable amount of time to liquidate the assets. The courts don’t want you to have to sell the assets for less than their fair market value just to satisfy an aggressive lender, so you should be given plenty of time to list and sell the assets.

Once you’ve liquidated the assets and gathered the funds into the estate checking account, follow the same process as before. Send the lender a check by certified mail with return receipt requested. Request proof of payment and proof of cancellation of foreclosure. Keep copies of everything for your final accounting.

Request an Injunction to Provide Reasonable Time to Sell the Property

If the estate doesn’t have sufficient assets to pay the overdue mortgage payments, it’s usually better to sell the house than to let the bank foreclose on the property. Foreclosed houses often sell for significantly less than fair market value, and if the bank doesn’t make enough money from the sale to cover the principle mortgage balance they may submit a claim against the estate to recoup the difference. Even if the house is underwater, the bank may agree to a short sale that eliminates the estate’s liability if the house sells for less than the principle mortgage balance.

Start by requesting another injunction from the court to provide you with enough time to appraise, list, and sell the house. If the first injunction was generous enough this may not be necessary, but the court will usually grant you significantly more time to sell a house than it will give you to sell vehicles, jewelry, art, etc. If you fail to secure a new injunction or extension, the lender may move quickly and aggressively to foreclose on the house before another injunction is issued.

Once you’ve secured enough time to sell the house, hire an appraiser to determine the fair market value for the property, and hire a realtor to list and sell the house. If the house’s fair market value is less than the principle mortgage balance, see if the lender is willing to agree to a short sale. Otherwise, use the proceeds of the house’s sale to pay off the mortgage. Any surplus from the house’s sale can then be used to settle the decedent’s other liabilities (debts, bills, taxes, etc.), and residual assets can be passed on to the estate’s beneficiaries.

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