How To Buyout Your Sibling And Unlock Your Inheritance

Probate Loans Explained

Oftentimes, upon the death of a parent, the heirs become owners of real property together.

Frequently, one or more siblings want to retain the property while one or more of them would like to sell the property and receive cash.

In many instances, the sibling who desires to retain the property lacks the financial resources to buyout the remaining siblings.

Usually, the property in question is held in an estate or trust and the title to the property is held accordingly.

That being the case, obtaining a conventional loan can be problematic for the heirs.

Most of the time, traditional lenders are unable to underwrite loans on properties held in estates or trusts. 

As a result, borrowers must turn to specialized loans in order to retain the subject property and to receive the various tax advantages. 

Trust, irrevocable trust, estate, probate and probate loans comprise the specialized loans which as a group are referred to as inheritance loans. 

What Is an Inheritance Loan?

An inheritance loan is a trust loan that can be used by the heirs of an estate to borrow money against the estate.

It is essentially a home equity loan that can be used to accelerate inheritance settlements.

Often times, an individual will not have the necessary funds on hand to buyout the other heirs.

Therefore, inheritance loans are commonly used when one heir of an estate wants to keep the family home and the others prefer a cash payout.

Hard Money Lenders

Since none of the heirs are on the title of the inherited property, traditional lending sources such as big banks and credit unions won't provide funding, which is why people often use private money lenders.

When underwriting inheritance loans, these types of lenders do not put a large emphasis on your income or credit score.  

Instead, they’re generally more interested in the value of the asset being used as collateral.

Private money lenders will typically loan up to 75% of the value of a property (aka, the loan-to-value ratio or LTV).

The funds provided by a private money lender can be paid to the estate for the benefit of the heirs who do not wish to retain the property.

Typically, the interest rate for a short-term private money loan is a little higher than a bank’s, however, the approval process and delivery of the the capital is much faster since there is less bureaucratic red tape to deal with.

Once the estate has been settled, the sibling who retains the property can then refinance to a more traditional lower cost mortgage once the title of the property is in their name.

What Is a Quitclaim?

By signing a quitclaim, an individual removes their name from the deed and surrenders ownership interest in the property.

Anyone signing a quitclaim should keep in mind that while they no longer own an interest in the property, they may still be responsible for the mortgage.

In the event of a death of a parent, it is unlikely the mortgage would be in the name of the children.

This would only be true if after the death of the parent, a refinancing occurred and both siblings were on the mortgage.

If both siblings signed the mortgage then both of them are on the hook for the mortgage, even if only one has ownership.

If the owner defaults, the lender is legally entitled to pursue the non-owner sibling.

Once the quitclaim has been executed, it should be notarized and recorded.

Get It in Writing

To alleviate possible misunderstandings between siblings, it is advisable to consult a lawyer and establish a legally binding contract.

In certain situations, the sibling who desires to retain the property is unable to obtain a hard money loan.

In that event, the solution could be to sign an agreement with the other sibling establishing the value of his share of the property and a fair rate of interest.

Arrangements such as this are well suited to situations where one party does not desire to hold real estate but seeks regular monthly income.

Things to Keep in Mind

• All terms of a buyout prior to the payment of funds or the execution of a quitclaim deed
• Provide an amortization schedule showing when the property will be paid for in full
• To further cement the arrangement, a deed of trust should be recorded
• The deed of trust provides security for the sibling by allowing them to foreclose should they not receive the agreed upon monthly payments

The Bottom Line

Inheritance loans are a valuable financial tool when one sibling wants to buyout another sibling of a shared real estate property.

One should always seek professional legal advice and get everything in writing before making a contract around an inheritance with one's siblings.

Not only are inheritance loans great for keeping a home in the family, but they can also provide heirs with significant tax advantages going into the future.

If you are looking for a California inheritance loan contact us today or for a more in-depth discussion of inheritance loans checkout, What Is an Inheritance Loan?