Refinancing Inherited Property and Estates
Why would you need to refinance an inherited property?
When a person passes away and leaves a property to one or more people, the property first goes into an estate that has to be distributed out after paying any expenses or debts of the estate.
For example, if you are left a home worth $200,000 but there was a $100,000 loan on the property owed by the person who died, that $100,000 loan needs to be paid off before you will get title and own the property. With the increased use of reverse mortgages in recent years, it is just as likely as not that a property will have a mortgage on it when the owner dies.
Mortgage loans cannot be issued to estates. Any existing liens on a property in an estate will need to be settled. Even if there is no mortgage or property liens, there are often other expenses that need to be paid off before the estate is distributed. Usually mortgage lenders will work with the attorney handling the estate to establish a plan for paying off the loan through sale of the property or refinancing by one or more of the heirs.
Mortgage refinancing – take the title and refinance at the same time:
If you are an heir to a property and you would like to keep that property, you can refinance into a new mortgage loan and take title to the property from the estate at the same time. Technically, this transaction can be both a refinance loan and a purchase mortgage at the same time depending on whether or not there are other heirs involved.
If you are the only heir to a property with a mortgage, you may need a loan to acquire the property. This transaction can be treated as a refinance and as a result you probably will be able to complete the transaction at minimal cost. You can finance up to 75% of the value of the home if needed (and up to 85% in some cases through the FHA Program and you will be able to keep any proceeds of the loan that do not go to pay off expenses of the estate.
Refinancing a property with multiple heirs:
If you have inherited a property with one or more additional heirs and you want to own the property for yourself, you can agree to refinance and use the proceeds of that refinance to pay each heir the value of their share. This transaction is technically a refinance and a purchase, but since you have at least one share of ownership in the property, you can usually use that share of ownership as your down payment or equity into the transaction so you will not need to make a cash deposit at closing.
It’s vitally important that you consult with both a lawyer and a loan officer if you inherit property that needs to be refinanced. They will be able to make you aware of any applicable state and federal laws, and will be able to guide you on your best course of action.