The note carries on. When a borrower dies, the debt becomes an obligation of their estate and your lien stays on the property, so you are still owed every payment. What changes is who you deal with, and how long it takes them to get organized.
The debt outlives the borrower
A note is a promise to pay, secured by a property. When the person who made the promise dies, it passes to their estate, which is everything they owned and owed at death. Your lien, the recorded claim that lets you look to the property if you are not paid, is attached to the land. It stays in place whoever ends up owning the home.
Who pays you now
That depends on what the family and the court decide. While the estate is being settled, the executor or administrator, the person a court puts in charge of it, may keep up the payments from estate funds. A spouse or child who lives in the home may want to keep it and take over the payments. The estate may sell the property instead, in which case you are paid off from the proceeds at closing. Or nobody steps in, the payments stop, and you are dealing with a default.
Your note may contain a due-on-sale clause, a term that lets the holder demand the full balance if the property changes hands. Whether it can be used after a death is a legal question, and federal law restricts it in some cases where a relative inherits the home, so ask an attorney before you rely on it.
What to do in the first few weeks
- Find out who is in charge. Ask the family who the executor is, or whether probate, the court process for settling an estate, has been opened.
- Write to that person. Give the balance, the payment amount, the due date and where to send payments. Keep a copy.
- Keep your records exact. Log every payment with its date and who sent it.
- Check the property. Confirm that the insurance is still in force and the property taxes are current, because an empty house with a lapsed policy is your risk as much as the estate’s.
- Ask an attorney about filing a claim. An estate may have a set period in which creditors must come forward. The rules differ by state, so take this from a local probate attorney.
If the payments stop
A missed payment in the weeks after a death may come from confusion over who is responsible. Give the family a short, written chance to catch up before you treat it as a default.
If the gap grows, your remedies are generally the same as with any late payer, with the estate standing in the borrower’s place. Your documents still decide what counts as default on a note, as they would with a living borrower. Foreclosing against an estate can involve extra steps that vary by state, so take an attorney’s advice before you start.
Can you sell the note at this point
Yes. A borrower’s death does not stop you assigning the note to a buyer, and a change of payer is one of the ordinary circumstances covered in when selling a note makes sense. The price depends on what the buyer can see, so if you send us the note details at this stage, say who is making the payments now.
If an heir has taken over and is paying on time, a buyer will want a few months of that record before treating the note as stable. If the estate plans to sell the home, a buyer may see a payoff coming and price for a short hold. If nobody is paying, the note is priced on the property’s value and the cost of recovering it, which means a wider gap between the balance and the price.
A note with a named successor who is paying sells for more than one where nobody yet knows who will pay, so waiting until that is settled can be worth it. If you would rather not wait, expect buyers to read the gap as they do when you are selling a note when the payer is late: the missed months count against the price until a run of on-time payments replaces them.
What to keep on file
A buyer looking at this note will ask for things an ordinary sale would not involve: the executor’s name, the probate case details if a case has been opened, and your payment log since the death.
Keep those three with the copy of your letter to the executor, whether or not you ever sell. An attorney will ask for the same papers if the payments stop, and so will the heir who eventually takes the loan over.
Related questions
Do the borrower's heirs have to pay the note personally?
Generally the debt belongs to the estate, not to the heirs as individuals. An heir who wants to keep the property has to keep the note paid, because your lien stays on it. The details depend on state law, so check with a probate attorney.
Should I keep accepting payments from a family member?
Generally yes. A payment from a spouse, child or executor keeps the note current. Record who sent each one, and ask an attorney before you sign anything that changes the borrower's name on the loan.
What if the house sits empty after the borrower's death?
Check the insurance at once, because some policies limit cover on a vacant home. Ask the executor who is looking after the property and whether the taxes are being paid. An empty property is a risk to your collateral.