"My Spouse Died. Can I Keep the Home, Do I Have to Refinance, and Can I Afford It on One Income?"

A surviving spouse usually has two things landing on the kitchen table in the same month: sympathy cards and a mortgage statement. The statement still has two names on it, and the household now runs on one income, or on one income plus a new benefit that has not started paying yet.

A death does not by itself force a refinance, because federal law keeps a lender from demanding the full balance when a spouse becomes an owner of a home the spouse lives in.

Whether you can afford the payment is a separate question about your income. A Social Security survivor benefit, for example, can count as income, and lenders look at whether it is expected to continue, with three years as the benchmark in Fannie Mae's guide.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, NMLS #483943, through C2 Financial Corporation. This article covers the mortgage side only. Your attorney handles who owns the home, what the will says and how probate (the court process that settles an estate) works, and I will say so wherever the two meet.

The law on keeping the existing loan

The federal law on due-on-sale clauses lists transfers a lender may not act on. A due-on-sale clause is the line in most mortgages that lets the lender demand the whole balance when ownership changes. The federal due-on-sale law lists among those transfers a transfer to a relative that results from the death of the person who took out the loan. It also lists a transfer where that person's spouse or children become an owner of the property.

A second federal rule describes the person who receives that ownership. The CFPB's servicing rule defines a successor in interest as a person to whom an ownership interest in the home is transferred from the person who took out the loan in certain ways. Those include a transfer to a relative after that person's death and a transfer where that person's spouse or children become an owner. A confirmed successor in interest is one whose identity and ownership interest the servicer, the company that collects your payment, has confirmed.

The federal rule that carries out the law applies to loans on a home that the person who took out the loan lived in or will live in, where the new owner lives there too. The statute covers homes of fewer than five units. The payment still has to be made on the loan's terms, and whether your loan and home fall under the law is a question for the servicer and your attorney.

Three ways a spouse can be tied to the loan and the deed

You are on the loan and on the deed. You already signed the note, the loan contract that holds the promise to repay, and the deed is the recorded document that shows who owns the home, so the loan is already yours. Please call the servicer, let it know about the death, and ask what it needs to update the account. Your attorney handles anything that changes on the deed.

You are on the deed but not on the loan. Your spouse signed the note alone. The servicer can tell you what it needs to confirm your identity and your ownership, and your attorney can supply the paperwork that shows it. The successor in interest definition above may apply to you.

You are on the loan but not on the deed. You signed the note, so you are responsible for the payments. Your attorney can tell you who owns the home now, which depends on how title was held and on your spouse's will, before any lender is involved.

An adult child in this position can read my article on an inherited home and its mortgage.

Refinancing into your own name

A refinance replaces the existing mortgage with a new one in your name alone. It makes sense when you want something the existing loan cannot give you:

• You want a lower rate or a different term, and the savings outrun the closing costs.
• You want your late spouse's name off the loan.
• You want cash from the home's equity (its value minus what you owe), called a cash-out refinance. My home equity hub compares that with a second mortgage or a line of credit.

If the existing rate is lower than today's rates, keeping the loan can be cheaper, because a refinance replaces that rate on the whole balance. Rate & Best Fit prices a refinance for your scenario, so you can see the new payment next to the one you have now.

Survivor benefits as income

Survivor benefits are payments made to a surviving spouse or dependent after a death, such as Social Security survivor benefits or VA survivors' benefits. Freddie Mac's guide on survivor and dependent benefit income lists both by name.

Freddie Mac's guide says a history of receipt is not required for the income to be considered stable, so a benefit that just started can still count. A newly established benefit must start on or before the first mortgage payment due date, and the amount counted is the documented fixed payment.

The next question is continuance, meaning whether the income is expected to keep arriving. Freddie Mac says survivor benefits "may or may not have documentable continuance of at least three years" from the date the application is received, depending on the source.

Fannie Mae's guide on Social Security income sets a three-year test for benefits drawn from another person's record: the lender must document that the income is expected to continue for at least three years from the note date.

An invented example with the arithmetic

These numbers are made up to show the sequence. None of it is a real file.

Debt-to-income ratio (DTI) is the share of your gross monthly income that goes to monthly debt payments.

A surviving spouse earns $3,400 a month from a job and receives a Social Security survivor benefit of $2,100 a month, with an award letter showing it will continue. The mortgage payment, including taxes and insurance, is $1,850 a month, and there are no other debts.

Monthly job income                  $3,400
Survivor benefit                    $2,100
                                    ------
Total monthly income                $5,500

Housing payment                     $1,850
Debt-to-income ratio                1,850 / 5,500 = 33.6%

Here the ratio comes to 33.6 percent. If the benefit had no documented continuance, the lender would count only the $3,400 from the job, and the same payment would be 1,850 / 3,400, or 54.4 percent. The award letter moves that number.

The VA rules for a surviving spouse

If your spouse was a veteran, the VA Lenders Handbook (VA Pamphlet 26-7) has rules for you, and my VA loans page covers the program in general.

Eligibility. The handbook lists the unmarried surviving spouse of a veteran who died from service or service-connected causes among the spouses who may have home loan eligibility. VA decides eligibility itself.

Funding fee. The funding fee is the one-time fee VA charges on its loans. The handbook exempts surviving spouses of veterans who died in service or from service-connected disabilities from it. VA's own fee page also exempts a surviving spouse receiving Dependency and Indemnity Compensation, a VA benefit paid to some survivors.

Streamlined refinance. The handbook's scenario table allows a VA interest rate reduction refinance loan, a VA streamlined refinance meant to lower the rate. The table lists it as possible when the veteran and spouse were both on the original VA loan, the veteran died, and the spouse alone is on the new loan.

Documents to gather

When you are ready, please provide these, all pages of each:

• Your most recent mortgage statement.
• The award letter, benefit verification letter or IRS Form 1099 for each survivor benefit.
• Your recent pay records, and your complete income tax returns, all pages and schedules, for the past two years if you earn income from a job or business.
• Your bank statements, all pages, even if the last page is intentionally left blank.

Your next step

You are welcome to run your scenario in Rate & Best Fit, which prices a refinance for your scenario. You can choose a rate option there, and that selection can change as we go. If you would rather talk it through, you are welcome to call me at (843) 765-0000 or email jeff@solverya.com.

Nothing here is legal advice, and nothing here is a loan approval, a denial or a commitment to lend.

Common questions

Do I have to refinance the mortgage when my spouse dies?

No. A death does not by itself require a refinance, because federal law keeps a lender from demanding the full balance when a spouse becomes an owner of a home the spouse lives in. The payment still has to be made, and your servicer can tell you what it needs from you.

Will a lender count my spouse's Social Security survivor benefit as income?

Often yes. Freddie Mac and Fannie Mae both look at whether the benefit is expected to continue for at least three years, and an award letter is one way to document the benefit.

Can I afford the mortgage on one income?

It depends on how your income compares with the payment. The example above shows the arithmetic, and I am glad to run yours.

Does a surviving spouse pay the VA funding fee?

No, if your spouse died in service or from a service-connected disability, because the VA handbook exempts you from the funding fee. VA decides eligibility.