Can I Get a Loan on Inherited Property?

Getting a loan when you inherit property

Your parents may have decided to leave you the family home in their will as part of their estate plan. Perhaps you don’t want to sell the house and have plans to live in it, but the estate doesn’t have the money needed to pay for the expenses of probate. You may wonder if you can get a loan on the inherited property to help you complete the probate process.

Can You Get a Mortgage on an Inherited Property to Buy?

You won’t be able to get a traditional mortgage on the inherited property because the deed isn’t in your name yet. Most lenders won’t fund a loan based on a property that you don’t own until later. It doesn’t matter if there is no current mortgage or if it is named to you in the will.

Probate is a lengthy and often complex process that can take months or even years to complete. During this time, many things can change, and the heir may not even inherit the property that was intended for them.

Understanding How Probate Works

Probate is a legal process that begins when someone files a petition with the probate court in the county where the deceased person lived before their death. This usually happens within a short time after the death of the estate owner.

The probate court will set a hearing where it will appoint an executor or personal representative to act on behalf of the estate. If the will named someone, the court will still need to approve it.

Duties of the Executor

Once the executor has been named and the court has provided letters testamentary to show that the person has the authority to act on behalf of the estate, they must begin their tasks. They will take inventory of all assets and determine value. The executor also provides notice to all creditors who will file claims against the estate for any debts owed.

Paying Off Debts

The executor must pay all outstanding debts with the funds available to the estate. If there isn’t enough money to pay the creditors and the debts are valid, they may need to begin selling off non-liquid assets. The executor will need to file taxes for the estate and pay any owed.

Distributing the Assets

Once all debts have been paid, the next step is for the executor to distribute the remaining assets to the heirs. They will transfer the deeds to the new owners so that probate may be closed.

Even if you have been named as the heir to the family home or other piece of real property in an estate plan, it doesn’t guarantee that you will get to keep it if money is needed to pay creditors.

The home may need to be sold to have the funds to pay other debts. If you don’t want this to happen, you do have other possible options, which will allow you to keep the property.

Inherited Property in Your Name

If a piece of real property is deeded to a surviving spouse or other co-owner, that person may automatically become the sole owner. The legal term is joint tenants, which means they have the right of survivorship.

When one person dies, their part of the property automatically transfers to the surviving owner without going through probate. If the property is owned as tenants in common, it doesn’t pass to surviving owners with the death of one owner automatically.

The property will probably need to go through probate, which may subject it to be sold to pay for outstanding debts. The surviving owner may not get to keep the property or may have a new co-owner.

An Inherited Property Free of Mortgage Payments

It’s often easier to find a lender willing to approve a loan for an inherited property if it doesn’t come with a mortgage. Most of these lenders will approve a loan up to 60 or 70 percent of the property value. If you have inherited a home worth $500,000, you could get a lump sum payment from the lender on a refinanced mortgage for up to $350,000.

An Inherited Home with a Mortgage Payment

That’s not to say it’s impossible to get a home equity loan on an inherited house with a mortgage. The issue you face when you refinance an inherited property is that the existing mortgage will need to be paid first.

If you inherit a property with an existing equity of $500,000 as above but it comes with a remaining mortgage balance of $100,000, you will only get $250,000 of the loan proceeds. Until you are approved for funds, you will need to keep up on the monthly payment.

Why You Might Need a Loan on Inherited Property

There are several reasons why you might need to get a loan on inherited real property. For instance, the estate may not have enough money to pay utilities or other expenses of the estate while going through probate.

Paying bills and Outstanding Debt

If you are the executor or personal representative of the estate and don’t want to sell the house to get access to cash, you may want to borrow money on the property instead as a home equity line of credit to pay related bills. If you live in a state with inheritance taxes, you may want to get a loan to pay those taxes.

If you have full authority as the estate administrator, you could apply for a loan that will be secured by the inherited property. You would be legally allowed to act on behalf of the estate or the trust.

Buy Out the Multiple Heirs

Another reason people want to get a loan on inherited property is to buy out their siblings or other heirs. If a home was given to multiple heirs and only one wanted to keep the house and live in it, they would need to buy out the others.

If there are other assets split between them, they could relinquish their share up to the value of the home. However, there may not be enough inheritance left outside the home to allow them to buy out their siblings. In this case, they would need to get a loan against the property to allow them to buy the other shares.

Refinancing Inherited Property

It is possible to get the lender to agree to refinancing inherited property. The refinancing process works best if you can get all the heirs to agree. Even if they don’t want to own the property, they may be willing to agree to the refinance, allowing you to become the sole owner. The remaining funds in a cash out refinance would go to them as a buyout.

Calculate the value of the property

You will need to calculate how much the property is worth and how much each person would be entitled to in a cash out refinance. The mortgage refinance would need to pay off the existing mortgage and have enough left over to pay for the other heirs’ share in the property. You will need to continue making payments on the property during the process to prevent it from going into foreclosure.

How to Get a Loan on Inherited Property

Find a lender when you inherit property

Since most traditional lenders are hesitant to approve a loan on inherited property, you may find it difficult to get approved. Inheritance loans from private lenders are an easier choice in loan options for most beneficiaries.

Benefits of an Inheritance Loan

With an inheritance loan or probate loan, the lender considers the value of the house as to how much they will agree to lend. They will let you know the interest rate and terms before you accept the funds along with the payment schedule. You don’t need to be on the title to qualify for one of these funding options.

Funding the Loan for the Inherited House

Once the loan has been approved, the funds will go directly to the estate or trust. The funds can be used to buy out the family member or other heirs who are willing to sell their interest in the property. The funds may also be used to pay for expenses related to the property or to make improvements so that it can be sold.

If the property has a traditional or reverse mortgage attached, the money will go to the mortgage servicer to pay the balance. You can also use the funds to pay the inheritance tax.

Paying Off the Current Mortgage

If the loan is paying for one beneficiary to buy out the other heirs, the property or mortgage deed can be transferred to the name of the beneficiary inheriting it. Once this has been completed, the new owner of the property can go to a bank or other financial institution and apply for a regular mortgage with a better interest rate to save money. They will have the opportunity to live in the house or use it as a rental property.

Assuming a Mortgage

In some cases, it may be possible to assume mortgage payments on a current mortgage for the inherited property to buy. You will most likely need to be approved by the mortgage lender to refinance an inherited property just as if you were applying for a new mortgage. It won’t matter whether you want to live in the house or use it as an investment property.

In this case, you would assume payments on the mortgage balance at the current mortgage rates and terms. After taking on the mortgage, you may even be qualified for a cash out refinance. However, you won’t have closing costs and other expenses associated with getting a new mortgage.

How to Avoid Issues with an Inherited Property

The best way to avoid issues with your estate is to have an estate plan. You can speak with a financial advisor and estate planning attorney who will assist you. If you place your home and other property in a trust, these assets will go to the named beneficiary without the complicated process of probate.

You can ask your financial advisors about your mortgage, especially if you have a reverse mortgage and you want someone to inherit property you own. They will advise you on how to handle your assets with an estate plan that meets state and federal law requirements.

Get Sound Financial Advice

Some states will allow you to file a quit claim deed to add someone to your property as an owner. In this situation, they can avoid going through probate to get the deed to the property. Not all states allow a quit claim deed, so you would need to discuss it with an experienced probate attorney.

Whether you want to use the inherited property as investment property or a place to life, you will need to consider the current mortgage and loan balance. Talk to an attorney or consider an inheritance loan to help you.