By Russell Barneson
By Russell Barneson
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 sibling(s).
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 heir(s).
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 and probate loans comprise the specialized loans which as a group are referred to as inheritance loans.
An inheritance loan is a trust loan that can be used by the heir(s) 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 heir(s).
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.
The Value of the Property
It’s important for all heirs to know and agree on the the value of the property if negotiating a buyout or planning to borrow against the asset.
Before doing anything, an appraiser should be hired to value the property.
The appraiser should be independent, well qualified, have knowledge of your local real estate market and not have a previous relationship with any of the heirs.
To insure all parties are satisfied with the appraised value, the heirs may even hire additional appraisers to get multiple opinions.
Once a value has been agreed upon, one heir may have the necessary funds to buyout the other heir(s).
If not, then they may need to seek out a private money lender who specializes in estate financing.
Are you looking to finance your inheritance loan?
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.
When underwriting inheritance loans, 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.
Hard money lenders will typically loan up to 75% of the value of a property (aka, loan to value ratio or LTV).
The funds provided by a hard money lender can be paid to the estate for the benefit of the heir(s) who do not wish to retain the property.
Typically, the interest rate for a short-term hard 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.
A Simple Example
Given a scenario where there are two siblings who have inherited a property and only one of them wishes to maintain ownership, the likelihood of successfully obtaining a hard money loan is very high.
The sibling who wants to retain the property will assume the loan and begin making monthly payments to the lender.
If there are 2 siblings and they both inherited 50% of a property, their only concern is financing the reaming fifty percent for the sibling who wants to sell.
Once the sibling who is relinquishing their interest in the property receives their funds, they then quitclaim their interest to the other sibling.
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.
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
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.
For a more in-depth discussion of these advantages checkout, What is an Inheritance Loan?
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