Quite often when someone inherits a house there are a number of questions that arise. Do I have to tell the lender that I have inherited the property and will they make me pay off the loan or sell? If I decided to sell, do I have to pay capital gains on the difference between the loan and selling price? How do I know what the basis was for the value of the home when it was purchased and does that matter?
For the first question, you should absolutely notify the lender immediately that you are now the new legal owner. They can not force you to pay off the loan or sell, if the property was transferred to a relative due to the death of a borrower. I am sure they will want copies of the transfer, but you want them to be aware that you are making the payments so you can get credit for it. Even if you don't currently qualify to get a loan, they can not call the note due as long as you continue to pay the mortgage according to the terms. You also want to be given credit for making the payments for credit purposes and being able to claim the interest you pay on the loan on your tax returns.
If you decide to sell the home immediately there are more than likely no capital gains tax owed, even if there is no mortgage. The reason for this also answers the third question. The value of the home at the time of transfer to you, or up to 6 months after, is your new basis for the value of the property. It does not matter what your relative paid for property. Example would be if your grandfather paid $15,000 for the home 50 years ago and in passing left you the home which is now worth $300,000, then your new basis is $300,000 and you can sell it and not pay capital gains. If you wait a year and you sell it for $400,000, then you have a gain of $100,000 which you would have to pay capital gains on (less closing costs, improvements and perhaps a few other deductions). Consult a tax advisor or attorney to review your particular situation because all situations have variables. This article is just an overview and may not apply to your own current situation.