Losing someone you love can put you into a downward spiral. Trying to figure out how to refinance an inherited property to buy out other heirs could easily take a heavy emotional toll.
And the truth is that we can’t help you with the grieving process, but we can help you through the process of refinancing an inherited property.
In this article, we will give you a step by step guide on how to refinance a property to buy out other heirs, as well as some alternatives to a refinance.
What Happens When You Inherit A Property With A Mortgage?
If you inherit a property with a mortgage because the borrower passed away, your rights to the property will vary based on if you were made the executor of the estate or just an heir.
If you are made the executor of the estate, then essentially, you have all the control over how the assets are divided and or paid out to the heirs.
If you are an heir, you are someone who can receive money based on the percentage of the estate left to you; however, you won’t have any control as to how that percentage is paid out.
The estate executor can decide to put the mortgage in their name if they have proof of income and credit.
However, if no one is left as an executor, the heirs will usually have to decide how to manage the property unanimously.
As long as payments are continued to be paid, the bank will not initiate a foreclosure due to the borrower passing away.
If the heirs can’t decide, then a judge will decide based on the best outcome for everyone.
Pros And Cons Of A Buyout
How you walk away from a buyout will depend on your financial circumstance as it involves the inheritance.
However, there are some things you need to consider that can be a benefit to your situation or could be harmful to your desired goal.
If everyone has agreed to a buyout, it’s probably in everyone’s best interest to receive the funds they would inherit from the property’s sale.
Plus, you get to:
Avoid property disputes: If the property becomes owned as a tenancy in common, it would be impossible to have any control over how they access the property or what part of the property belongs to them. Letting someone buy you out of the property would avoid this issue altogether.
Get a lower mortgage: The best thing about a buyout is that if you have better credit than the person who originally owned the property, you can get a much lower rate on the mortgage. This is ideal if you plan to keep the property to live in.
Avoid a buyout later: If you decide on a buyout at a later date, you could potentially lose more money, especially if the property has increased in value since you inherited it. It would probably make it harder to get everyone to agree to a buyout later down the line.
Here are some situations you need to consider when thinking of buyout refinancing.
Inherited debt on a mortgage: One thing to consider is if there is debt owed on a mortgage that you have inherited. When someone passes away, it doesn’t always mean they’ll have any missed payments; however, if there is debt on the mortgage, the mortgage company will want it cleared up right away, or they might start the foreclosure process. If you do end up refinancing the loan, you’ll have to cover the loan’s total amount, which could cost more if a debt is owed on the mortgage.
Is your credit good enough to qualify? While you might be considering the idea of refinancing an inherited property, it is essential to make sure you can qualify based on income and credit. If you can’t find a lender willing to refinance your loan due to your credit, you could be in a situation where no buyout is possible.
The type of mortgage you’re refinancing: Some mortgages can be much harder to refinance, such as a reverse mortgage. If you inherit a property with a reverse mortgage, you’re only given 6 months to refinance the mortgage after the original borrower’s death. If you decide to keep the home, you need to obtain a forward mortgage or pay 95% of the home’s appraised value.
Agreeing on refinance fees ahead of time: There will be fees associated with refinancing the mortgage. You need to decide how these fees will be split up before you get into the process of trying to refinance. You don’t want to pay fees if you’re refinancing the home, and others will still be part of the inheritance.
How To Refinance To Buy Out Heirs
Refinancing an inherited property is as simple as taking a cash-out refinance, or probate loan, to buy out the other heirs. Once you’ve successfully bought out the other heirs, the estate will transfer the title into your name, along with any remaining debt on the property.
Probate loan: Think of a probate loan as more of an advance on your inheritance than an actual loan. In exchange for immediate payment, the probate lender will receive your inheritance once the probate proceedings end. Of course, the lender will only offer this advance if they can see it will make them money. Probate loans are also sometimes called estate loans, inheritance loans, and trust loans.
Cash-out refinance: To use this option, you’ll need to have equity already in the home, and you’ll need to take out a new mortgage that covers the existing loan and the difference in equity. You could use this method to purchase your home and use the equity to pay off the remaining heirs. This method will make you responsible for the full amount of the loan; however, the house would be 100% yours.
Regardless of the route you take to refinance, you must continue to pay the mortgage until someone takes new ownership of the home. You don’t want the property going into foreclosure while you try to figure things out.
1. Apply For A Probate Loan
When you apply for a probate loan, it’s good to remember that the lender will already know and understand your situation. You’re going to need documents such as:
- The amount requested and for what purpose
- Order for probate
- Inventory and appraisal (or property address)
- Petition for probate
- Decedent’s death certificate (required by title company)
Outside of this, you should treat a probate loan like any other borrowing instrument. Your goal is to get the best terms available for your loan, so be sure to shop around and don’t go with the first offer presented.
2. Underwriting Process
Once your application for a probate loan has been submitted, the lender will review your file and determine the value of the property. There is a possibility that they come back with a lower appraised value than you expected. You should make sure whatever option you choose will work best for you and your family.
3. Closing And Funding
You can expect it to take about 1 – 2 weeks before the cash is sent to your bank account. This is why it’s crucial to know what you’re doing with the home as soon as possible.
4. Buy-Out Beneficiaries
You can also take out a probate loan based on the equity left in a home, which can be used to pay off other beneficiaries. The lender will distribute funds based on property ownership percentages. This is the best option if you want to remain the owner of the property.
5. Property Title Transfer
Depending on who the title is transferred to, you might be able to avoid an increase in your property taxes. For example, Prop 58 in California is a state constitutional amendment which allows transfers of property from children or grandchildren to be excluded in property tax reassessments. Be sure to apply for this exclusion if you think your tax rate might go higher if the property is reassessed.
6. Refinance With The Existing Mortgage Lender
You can also refinance the mortgage with the existing lender based on your credit and debt-to-income ratio. Of course, they will know the situation, but you should still shop around for rates before making a decision.
Alternatives To A Refinance
There are several alternatives you can take instead of dealing with a refinance, and those are:
Enjoy your new home: Most of the time, it’s family that we will be splitting an inheritance with, and if you can split the payments and time equally, there is no reason everyone shouldn’t enjoy the home. Maybe you decide to treat it as a vacation home, and everyone can schedule equal usage.
Sell the property and divide: Another quick answer is to just sell the property for the highest price you can get and then split the proceeds equally. This is probably the simplest thing to do if you want to avoid any possible headache that can come with owning a property with multiple people.
Rent the property: Together, you could rent the property out, and one of the heirs could take on the landlord’s duties. This would immediately give you and the other heirs a form of residual income and give you your first taste of real estate investing. This option requires more management but could be more profitable over time.
Figuring out how to refinance an inherited property to buy out heirs isn’t that complicated, but how you choose to go about the refinance can save you money or cost you.
If you have inherited property, it’s crucial that you decide within the first 30 days of inheritance (along with any other heirs) on what you will do with the property.
To be on the safe side, it’s probably best to contact a refinance expert to discuss your options because local laws and regulations vary by state.