How to Refinance an Inherited Property to Buy Out Heirs

Refinancing Inherited Property – How to Buy Out Other Heirs

Heirs who recently inherited a property (real estate) may be faced with the problem of dividing their interest in the real estate. Selling the property would seem to be the easy solution, but one or more of the beneficiaries may want to keep the property while others just want the cash. This type of scenario often results in the heirs looking for a solution on how to refinance an inherited property to buy out heirs. Essentially they need a cash out refinance on the inherited property to raise funds for the buyout. Refinancing inherited property is typically not available from conventional lenders. An experienced inherited property lender can help explain the process of how to buy out other heirs and distribute the assets of the inheritance but heirs should consult a trust or estate planning attorney.

Cash Out Refinance Inherited Property

If the real estate has sufficient equity (market value minus all loans/liens) the heirs can obtain a cash out refinance on the inherited property to pay off the heirs who want cash. Inheriting a house that is paid off is the ideal scenario as this allows for the largest equity distribution to the heirs and highest net proceeds available from the lender. Dividing an interest in the inherited property between two heirs is typically straightforward as this would result in a loan to value of around 50%. If an heir is trying to buyout a property with six total heirs this would be more challenging as the required loan to value would be above 83% unless there were other assets being distributed to help offset the loan amount.

Refinancing inherited property is not provided by traditional mortgage lenders (banks, credit unions, etc.). Getting a mortgage on an inherited property is complicated by the fact that the property is currently owned by an entity, not the individual that is requesting the loan. Typically only specialized probate, estate and trust loan lenders have the flexibility and experience to provide these types of loans.

There are various different names for these types of loans:

Probate loans – Probate real estate loans – Trust loans – Inheritance loans – Irrevocable trust loans – Inheritance advance – Inheritance cash advance – Probate funding – Estate loans to buy out siblings

While the names vary, the purpose of the loan is refinancing inherited property to buy out other heirs, beneficiaries or siblings.

Refinancing Inherited Property with a Probate Loan or Estate Loan

Refinancing an inherited property with a probate or estate loan is necessary when the inheritance is an estate. A probate administrator will need to be named and approved by the court. This individual will be responsible for acting on behalf of the estate. The probate administrator will need to apply for the probate loan and fill out the necessary applications and paperwork.

Probate Loan Example – 6 Steps

1. Apply for the Probate Loan

The probate administrator will need to fill out a business purpose loan application with information about the estate and the real estate within the estate that will serve as the collateral for the probate loan. The probate administrator will need to have letters of administration with “full authority” from the court.

The individual(s) who will maintain ownership of the inherited property and be responsible for paying off the probate loan must provide their financial information. They will need to complete a personal financial statement and submit some form of income documentation and credit information. This is to ensure that the borrower has the financial strength and creditworthiness to refinance the probate loan into a long-term conventional loan.

All of the beneficiaries of the estate will need to approve of the probate loan being placed against the real estate. Each beneficiary will need to sign a notice of proposed action that states they approve.

2. Obtain Probate Loan Approval

The applications, requested documents and property address will be reviewed. In many cases this can be completed in as few as 1-2 days. If everything is satisfactory the lender will notify the borrower that their loan has been approved. The probate loan lender will then move forward with the loan and open title and escrow.

3. Probate Loan Funding

The probate loan funding process typically takes 5-7 days as long as there are no issues with title.

In some situations, there are loans or liens recorded against the real estate that show up on the preliminary title report that the borrowers were unaware of. Clearing up issues and arranging to have these loans and liens paid off will add additional time to the funding process.

The probate loan proceeds can then be sent directly to the estate’s bank account.

4. Buy Out Beneficiaries with Probate Loan Funds

Once the probate loan proceeds are sent to the estate’s bank account, the funds can be distributed to the heirs who are selling their interest in the real estate.

5. Transfer Title of Inherited Property

The title of the real estate can now transfer directly from the estate (parent) to the heir (child). This parent to child transfer allows for the transfer to be eligible for Proposition 58 in California. Prop 58 excludes parent to child transfers from property tax reassessments.

Excluding a property tax reassessment on a transfer with Prop 58 or Prop 19 can save the inheriting heir thousands of dollars each year they own the property.

READ MORE: Prop 58 Loans Prop 19 Loans

6. Pay Off Probate Loan with Refinance or Cash

After the title of the property has been transferred to the inheriting heir, their name will then show on title as the owner of the property. This will now allow for refinancing the inherited property with a long-term mortgage from a conventional lender such as a bank, credit union or other large institution. These types of mortgages typically provide the heir with the lowest interest rate and longest term available.

If the heir has cash on hand to pay off the probate loan, the loan can be repaid after the transfer is complete and Prop 58 has been filed and approved. In some situations, heirs have sufficient cash to buy out their siblings from the property but they first need a 3^rd party probate loan in order to qualify for Prop 58.

Conclusion

While the outlined process for refinancing inherited property seems straightforward, it is important to work with an experienced probate loan lender who knows how to refinance an inherited property to buy out heirs. Often times an inexperienced lender will commit to funding a probate or estate loan only to discover they aren’t able to provide a loan to a borrower who isn’t on title. This results in wasted time and frustration for the heirs.