Getting A Home Equity Loan On An Inherited Property

Inheriting a property can be a major windfall, regardless of whether you expected it. However, it can also come with its own debts and obligations. For example, you could inherit a home that requires major renovations before you can either live in it or sell it. That’s where a home equity loan could be a good tool — it allows you to borrow from the existing equity in the home.

However, qualifying for a home equity loan may be more complicated on an inherited property. Similarly, complications can arise if you inherit a home that already has a home equity loan on it.

If you’ve inherited a home or anticipate you might soon, keep reading to learn some key features of inherited properties, how to get a home equity loan on an inherited property and what happens if you inherit a home with an existing home equity loan.

Understanding Inherited Properties

If a close loved one passes away, you may find yourself getting their home as a part of your inheritance. It’s important to understand what it means to inherit a property, including the common financial obligations and whether you can get a home equity loan on an inherited property.

Definition Of Inherited Property

An inherited property is one that’s passed down to you when its owner passes away. There are several different ways you could inherit a property. For example, if you had joint tenancy of the property with the other owner, you would inherit full ownership of the home upon their passing.

You could inherit a property that someone leaves you in their will, or if the owner didn’t have a will but you’re the legal beneficiary, according to your state’s succession laws.

Inheriting a house by yourself is a relatively simple process in most cases. You can simply change the deed to be put in your name, and you’ll be the legal owner. If you inherit a house with siblings or another beneficiary, the process could be a bit trickier.

Common Financial Obligations With Inherited Properties

One of the most common financial obligations when you inherit a home is the mortgage. The latest data from the U.S. Census Bureau shows that 61.5% of homes have mortgages on them, meaning there’s a good chance any home you’d inherit would as well.

If you inherit a home with a mortgage, you’ll be responsible for repaying the loan, whether by assuming it, refinancing it or selling the home. You’ll also be responsible for any other financial obligations that come with the home. These could include property taxes and utilities. Finally, if the home needs significant repairs before you can live in or sell it, you would be on the hook for that cost.

Depending on the situation, you could get a home equity loan to help with some of these expenses, as we’ll talk about in the next section.

Can You Get A Home Equity Loan On An Inherited Property

You can get a home equity loan on an inherited property. After all, once you legally inherit the property, you’re just as much its owner as someone who purchased their home themselves.

The process will be easiest once the home is officially in your name. In that case, you’ll apply for the loan just as you otherwise would. Keep in mind that you’ll still have to meet all of the eligibility requirements related to your credit and income, loan-to-value ratio, etc.

Using A Home Equity Loan On An Inherited Property

If you inherit a property, you could get a home equity loan to make improvements to the property, consolidate your debt or for some other reason. Home equity loans are unique in that, though they are secured by your home, they can be used for nearly any purpose, which gives you plenty of flexibility as a homeowner.

If you’re considering getting a home equity loan on your inherited property, there are a few things you’ll need to do first.

Assess The Property Value And Condition

First things first, it’s important to assess the property's value and condition before applying for a loan. The limits on home equity loans are generally based on the home value and your existing loan amount.

Many lenders allow you to borrow up to 80% of a home’s value. For example, if the current mortgage on the home has a loan-to-value ratio (LTV) of 70%, you may be limited to borrowing just 10% of the value.

Assessing the condition of the home can also help you determine how much you want to borrow, especially if you’re planning to use the loan for home improvements. It may be worth getting an estimate from a contractor ahead of time to make sure you borrow the right amount.

Review Existing Debts Or Obligations

A home equity loan will create an additional monthly payment for you, so it’s important to review your existing debts and financial obligations to make sure you can afford it. Consider the monthly mortgage payment on the home, as well as any other debts or monthly payments you’re responsible for.

Keep in mind that lenders will also look at this information. Known as your debt-to-income ratio (DTI), the percentage of your income that goes toward debt helps lenders decide if you’re a good candidate for a loan.

Prepare Heirs For A Home Equity Loan

It’s possible to get a home equity loan on a home you’ve inherited jointly with other heirs. In fact, many use these loans as a method to buy out other heirs’ property stakes if just one heir plans to keep the home.

You don’t necessarily need the other heirs to be co-borrowers on your home equity loan. If you can qualify based solely on your income and credit score, you can get the loan as the sole borrower. However, you may need permission from the other co-owners since the lien on the home would affect them as long as they are listed on the deed.

Inheriting A Home With An Existing Home Equity Loan

It could also be the case that you inherit a property that already has an existing home equity loan. In that case, you’ll have several options for how to proceed (all of which still require repayment of the loan).

Assume The Home Equity Loan Payments

The first thing you can do if you inherit a property with a home equity loan is to continue making the loan payments. You may decide to go this route if you plan to keep the home and the loan has favorable terms, such as a low interest rate and/or monthly payment.

Refinance The Mortgage

Another option to deal with the home equity loan on your inherited home is a mortgage refinance using a cash-out refinance. You’ll get a new mortgage large enough to cover the existing mortgage and home equity loan — and even some additional cash out, if you have enough equity.

This option is ideal if you can get a lower mortgage rate and want to wrap both loans up into one simpler and more affordable monthly payment.

Sell The Home

If you’re planning to sell the inherited home, you can simply pay off the loan with the proceeds of the sale. Keep in mind that if you go this route, you’ll have to continue making the loan payments until the sale of the home is final.

Apply For A New Home Equity Loan

A final option for the home equity loan is to apply for a new home equity loan to replace the current one, essentially refinancing it. This is a good option if the current home equity loan has a high interest rate or monthly payment (or both) and you can qualify for a lower one.

Home Equity Loans for Inherited Properties: The Bottom Line

A home equity loan is a popular tool for accessing cash using the existing equity in your home. While it can be used for many different purposes, it may be particularly beneficial when you inherit a house, especially if you want to renovate, buy out other heirs and more.

It’s possible to get a home equity loan on a house you inherit, but it’s also possible the home will already have an existing loan. Either way, you’ll have plenty of options and can find the one that best fits your financial situation and goals for the home.

If you’re considering a home equity loan on an inherited home, consider applying for a second mortgage today.