Gifting Property with a Mortgage

[iEngineer]

What is the name of your state? Pennsylvania

Hello! I want to make sure I have all of my ducks in a row as I am in the process of purchasing my first home. I live with my long term girlfriend of 8-years and the title to the home will be held by myself. I don't have a very complex estate so I currently only have a simple will which will show her as receiving the home should something happen to me. I had a few questions I was hoping someone could assist with:

1. Do the federal laws that allow for the transfer of the loan to an heir apply to her as well since she's named in the will?
2. I found that purchasing life insurance is cheaper than mortgage protection insurance so I plan on taking out a policy to make sure there would be sufficient funds available to cover the balance of the mortgage. I'm questioning if she needs to be the beneficiary though or if the beneficiary needs to be my estate (if this is even possible)?

From my understanding life insurance wouldn't be part of the probate process and that she (if named as the beneficiary) would be able to use this money for anything she sees fit (which I would be okay with if circumstances change), but I also want to make sure she has the option to use it to pay off the home and continue living in it.

In case it matters...She is named as a co-executor with my father, but if he does not survive me then she would be the sole executor. She is also receiving most of the other property as well as a "payable on death" savings account (which I believe also avoids the probate process).

Thanks in advance for any assistance you provide.

 

[Taxing Matters]

Do the federal laws that allow for the transfer of the loan to an heir apply to her as well since she's named in the will?

Not if you are the sole owner of the home and not married to her. The federal law to which you refer is the Garn–St Germain Depository Institutions Act of 1982. It would prohibit the lender from pulling the trigger on its due on transfer clause upon your death if (1) you and she co-owned the home as joint tenants with a right of survivorship OR (2) she was your spouse at the time you died and inherited the property.

I found that purchasing life insurance is cheaper than mortgage protection insurance so I plan on taking out a policy to make sure there would be sufficient funds available to cover the balance of the mortgage. I'm questioning if she needs to be the beneficiary though or if the beneficiary needs to be my estate (if this is even possible)?

The law does not prohibit you from doing it either way. Discuss the options with your insurance agent.

From my understanding life insurance wouldn't be part of the probate process and that she (if named as the beneficiary) would be able to use this money for anything she sees fit

That's correct.

 

[iEngineer]

Thank you. That’s what I was figuring from my research. I’ll have to ask my insurance agent what they’ve seen and if there’s any advantage one way or the other.

Say she is the beneficiary on the policy...is there anything that would prevent her from using (or the lender from accepting) funds to satisfy the remaining balance of the loan? Then the property would be owned outright by her (paying any transfer fees or taxes also due on the transfer).

I assume that would work pending there are no other creditors or outstanding debts that my remaining estate couldn’t cover. If there were debts I would assume they could make a claim for the home to satisfy those debts during probate and would inhibit my gifting of the home to her.

 

[LdiJ]

Thank you. That’s what I was figuring from my research. I’ll have to ask my insurance agent what they’ve seen and if there’s any advantage one way or the other.

Say she is the beneficiary on the policy...is there anything that would prevent her from using (or the lender from accepting) funds to satisfy the remaining balance of the loan? Then the property would be owned outright by her (paying any transfer fees or taxes also due on the transfer).

I assume that would work pending there are no other creditors or outstanding debts that my remaining estate couldn’t cover. If there were debts I would assume they could make a claim for the home to satisfy those debts during probate and would inhibit my gifting of the home to her.

Since she will be inheriting the house, there would be no advantage to the lender to refuse to accept payment for the mortgage. If she is the beneficiary of the life insurance policy she can spend it how she likes.

Yes, of there are outstanding debts the house would have to be sold to cover those debts. However, she could use the insurance money for that too if there is enough of it available.

 

[Taxing Matters]

Say she is the beneficiary on the policy...is there anything that would prevent her from using (or the lender from accepting) funds to satisfy the remaining balance of the loan? Then the property would be owned outright by her (paying any transfer fees or taxes also due on the transfer).

No legal prohibition on her doing that. The loan contract may allow the lender to call the entire loan due when the property transfers to her, but if she can either pay it off with the insurance money or refinance with a loan of her own to pay it off then that demand isn't a problem.