It is natural for heirs to wonder aloud, “Can I get a home equity loan on an inherited property?” when they inherit real estate passed down to them in the will. However, the equity status of the property will determine whether it becomes a burden or asset for the inheritor.
Exploiting inherited properties’ home equity and credit potential has pros and cons. One con is that holders of inherited properties sometimes ascribe sentimental value to them and are usually reluctant to use them as collateral.
So, to the question, “Can I get a home equity loan on my parents’ property,” the answer is by all means’ yes.’ At the same time, getting a home equity loan on an inherited property is possible. Nonetheless, it needs to be done right to be considered. Here’s how.
How to Get a Home Equity Loan on an Inherited Property
First, a regular home equity loan is more like a second mortgage. Homeowners’ eligibility to draw this fund depends on the equity amassed on the property. For clarity, equity is what a homeowner would have left if they were to sell their property and deduct the mortgage balance from the deal’s proceeds.
Similar to mortgages, home equity loans are awarded in a lump sum, and repayment is made at a fixed interest rate over an agreed-upon period. Well, it’s that simple when the real estate in question is the original property of the homeowner. If the property is inherited, obtaining home equity becomes a tad complex.
However, folks with inherited properties still give it a shot because a home equity loan is an attractive source of funds for major expenses like school funding, home renovations, or major repairs.
So, here’s the right order of steps to take when applying for a home equity loan on an inherited property:
Assume Ownership of the Property
No, just moving in after you inherit a house is not enough to make you the legal owner. Instead, an heir to a property must ensure the property’s title is in their name. All the paperwork that establishes you as the legal owner has to be in place before applying for a home equity loan.
Determine the Standing Equity of the Property
Get a professional to appraise the current market value of the property. With the help of a home equity loan calculator, determine the standing equity of the property.
Establish Your Creditworthiness
Do a personal assessment of your credit report. Consolidate all financial documents that prove your creditworthiness. Print bank statements to prove your income flow and economic stability if possible.
Look for a Suitable Home Equity Lender
There’s no good or bad home equity lender; your goal is to find the best deal. The particular things to look out for in each offer are minimal fees, interest rates, and competitive repayment terms.
Put in an Application
After picking a home equity lender to go with, apply. Alongside the application, remember to include all the necessary documents. Top on the list of documents to provide are financial records, credit reports, equity appraisals, and evidence of ownership.
Wait for Feedback from the Lender
The lender reviews the home equity application. In most cases, the review process may involve a hard inquiry to substantiate your credit report and assessment of other submitted documents.
Close the Home Equity Contract
Once satisfied with the application, the lender sends feedback notifying you of their approval. The final stage of the home equity loan application is the signing of the agreement. Right after the necessary paperwork is completed, the lender disburses the funds.
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How Can I Find Out if the Home I Inherited Carries a Home Equity Loan?
Inheriting a house with a home equity loan can be tricky. Hopefully, the party who left the property to you left all the accompanying documents intact. If that’s the case, finding out if the property has a home equity loan is easy. Simply going through the property documents should reveal any home equity loan, paid off or pending.
If, for some reason, the property documents are not in order, there are some ways out of that dilemma. The first option is to go through the bank statement of the property’s previous holder, assuming it’s inherited and not bought. What you are looking for are recurring payments. It is also possible to identify a home equity loan on an inherited property through a title search.
ALSO READ: Understanding a Reverse Mortgage Line of Credit
What Happens to a Home Equity Loan After Death?
The legal implications of a home equity loan are similar to those of a mortgage. What happens after a property owner with a standing home equity loan passes away depends on multiple factors. The property law applies in the host state; the other is the property’s new ownership. This aspect may need to be settled through probate.
However, if ownership status is not in question, the new homeowner would have to notify the lender of the previous owner’s demise. Afterwards, the new owner(s) of the property will have to agree on a repayment plan for the existing equity. Some new owners may decide to pay off the loan in a fell swoop, maintain the standing repayment schedule, or renegotiate the repayment terms.