I Inherited a Mortgage Note. What Do I Do Now?

Someone passed away, and among the paperwork there's a promissory note and a mortgage on a property nobody in the family lives in. Somebody out there has been sending a check every month. Now what?

This is more common than people think, and the first thing to understand is that you've inherited something of real value — not a chore.

What you actually own

You own the right to collect the remaining payments, plus the security behind them. Two documents matter:

• The promissory note — the buyer's written promise to pay, with the amount, interest rate, and schedule.
• The mortgage, deed of trust, or bond for deed — the document that ties that promise to the property, so there's something to take back if the buyer stops paying.

You need the originals of both, or at minimum to know where they are. Originals matter in this business in a way they don't with most paperwork.

First four things to do

1. Find the documents. Note, mortgage, closing statement, and any payment records. Check the safe deposit box, the filing cabinet, and the attorney who handled the original sale.
2. Confirm the succession is handled. Until the estate is properly settled, you may not legally be the owner of those payments yet. In Louisiana this is the succession process. Nothing can be sold until it's done.
3. Find out where the payments are going. They may still be going to a bank account in the deceased person's name, which creates its own problems. Some notes are handled by a servicing company; many are not.
4. Pull the parish or county records. Confirm the mortgage was actually recorded and see whether anything else is filed against the property.

What you're now responsible for

Less than you'd fear, but not nothing. You need to track payments and apply them correctly between principal and interest. You need to know whether the buyer is keeping property insurance in force and paying the property taxes — if they stop, your security erodes quietly. And at the end, when the note is paid off, you have to issue a release so the buyer gets clear title.

There's also an annual tax reporting piece. Interest you receive is income. Talk to a tax preparer about how the inherited note should be reported, including the basis step-up question, which can matter a great deal.

The three choices

Keep collecting

If the buyer pays reliably, the interest rate is decent, and nobody needs the money, there's nothing wrong with holding. It's income that arrives without effort.

Sell all of it

Turn the remaining payments into one lump sum. This is what most people choose when heirs are splitting an estate, because cash divides cleanly and a payment stream doesn't. Trying to split monthly checks three ways for the next eighteen years is a recipe for family friction.

Sell part of it

Sell a set number of payments — the next sixty, say — take the cash now, and the note reverts to you afterward. Useful when you need some money but like the income.

When several heirs are involved

This is where most inherited notes get complicated. Everyone has to agree, and everyone has to sign. One sibling in another state who won't return calls can stall the whole thing.

A clean sale and a cash split is usually the path of least resistance, and it ends the question permanently rather than leaving someone responsible for bookkeeping that nobody wants to do.

What it's worth

Less than the balance showing on the amortization schedule, and that surprises people. The balance assumes every payment arrives on time for the full remaining term. A buyer paying cash today is taking on the risk that it doesn't, and is giving up the use of their money in the meantime.

What moves the number: how long the buyer has been paying, how much they put down, the interest rate, the property's current value, and whether the paperwork was done properly.

Find out before you decide

Getting a number costs nothing and commits you to nothing. Even if the family decides to hold, it's worth knowing what the asset is worth — for the estate accounting if nothing else.

One note: this is general information, not legal or tax advice. Inherited notes touch succession law and tax questions that vary by state and by situation. Talk to an attorney and a tax preparer before you act.

Written by Smith Washington Jr., founder of DeedBrook, Lake Charles, Louisiana.

Read next: My Buyer Stopped Paying on My Owner-Financed Note

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