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Inheriting a home can be a bittersweet experience. It's likely a consequence of losing a loved one, though this gift may help you have a brighter financial future. It can also come with a variety of headaches, from legal to financial to family infighting, as you sort out the often-complicated process and decide what to do with the property. If you need cash, one option is to take out a home equity loan.
You can get a home equity loan on an inherited property if you need cash for purposes such as buying out siblings, paying off a small mortgage balance or updating the property.
How Inheriting a House Works
The process of inheriting a house can vary depending on a few different factors. One is whether the house is passed to you as a beneficiary of a trust or through probate. Hopefully your loved one did some estate planning in advance to make the process smoother.
In the legal process of probate, an executor manages the estate and may sell assets (including a home) to pay off debts. The executor distributes the rest of the assets to you and any other beneficiaries or heirs. If the home wasn't sold to pay debts, you may inherit it, either solo or along with other heirs.
If your loved one had the home in a living or irrevocable trust, the process is expedited. The beneficiary gets to bypass probate and automatically become the new owner of the house.
Regardless of how you inherit it, once the home is officially yours, there's another fork in the road: You can choose to sell it or to keep it, either to live there or rent it out as an investment. Whether or not the property has a mortgage, however, can play a huge role in your decision.
Can You Borrow Against an Inherited Property?
There are a few different ways to borrow money against a property you've inherited. Your options for lenders and exact loan types will differ depending on whether the property has already been transferred to your name or is still in the estate or trust's name.
Borrowing against an inherited property may be done for several reasons and can happen in a few ways; some heirs may opt for a cash-out refinance, which replaces the old mortgage with a larger new one in your name, leaving the extra as cash.
Others may opt for a home equity loan on an inherited property. Rather than replacing the original mortgage, this entails getting a second mortgage by borrowing against the home's equity. It provides a lump-sum payment that's repaid in fixed monthly installments. Home equity loans on inherited properties are sometimes used for:
- Buying out siblings: Say you want to keep the home, but your siblings or fellow heirs don't. You want to buy them out and retain the house, but you can't afford to pay that much upfront. Taking out a home equity loan allows you to use the home's equity to buy out your other family members.
- Paying off the loan: If the mortgage loan's balance is small, you could take out a home equity loan to pay off the balance. This could be appealing if the original loan terms weren't favorable or had monthly payments that exceed your budget.
- Improving the property: In situations where the property needs repairs or upgrades, either for you to make it liveable for yourself or to get it ready to rent or sell, a home equity loan can provide the cash.
- Covering legal costs: If you need help covering expenses related to the estate or trust, a home equity loan can give you the capital to pay for them.
Before you consider taking out a home equity loan on an inherited property, keep in mind that there are limits to how much you can tap.
Most lenders won't let you borrow more than 75% to 80% of the total equity in the home. Additionally, the loan is secured by the home, meaning interest rates are typically lower than non-secured means of borrowing. On the flip side, since the home serves as collateral, you're at risk of losing it if you default on the loan.
Learn more >> What Are the Pros and Cons of a Home Equity Loan?
How to Get a Home Equity Loan on an Inherited Property
If you're interested in taking out a home equity loan on a property you've inherited, here are some steps to follow:
- Ask the lender about requirements and process. Taking out a loan on an inherited property can be simple or complicated depending on several factors. It's more difficult if the home is still in the estate's name or if you're using the loan to buy out other heirs. Before proceeding, it's wise to talk with the lender to get a sense of their process and loan requirements for your situation.
- Request a property appraisal. Once you know the home's current value, you can subtract any mortgage balances or liens to determine the home's equity. From there, knowing that lenders typically won't let you borrow more than 75% to 80% of the equity, you can calculate around how much you could expect to get. You'll have more equity available if the home doesn't have a mortgage.
- Check your credit. Your ability to qualify for a home equity loan—and how much you may be able to borrow as well as your interest rate—will be determined largely in part by your consumer credit score. Check your credit report and score (something you can easily do for free with Experian anytime) and see if there are any factors that may impact your ability to get approved. If you aren't in a hurry and your credit could use some work, taking some time to improve your credit can improve your chances of qualifying for a home equity loan.
- Shop around for a lender. Don't go with the first home equity lender you approach; getting the best rates and terms will mean shopping around with different lenders.
- Apply for the home equity loan. If you followed the earlier steps, you'll know what documents are required and already have them ready for the lender. If approved, you'll receive a lump sum you can use for any purpose, and then repay it in monthly installments for the duration of the term.
Consider Your Credit
When you assume a mortgage on a home you've inherited, the lender isn't obligated to check your credit or ensure you have the ability to repay, though some do. However, if you want to refinance or get a home equity loan, the lender will review your credit and financial history.
If your credit needs improvement, and you hope to get a home equity loan on inherited property, consider taking some time to work toward increasing your credit score. You can see where you stand and track your progress for free with Experian credit monitoring.