Can I get a home equity loan on an inherited property?

If you’ve recently inherited a home, you might be wondering if you can tap into its value with a home equity loan. Whether you plan to renovate, consolidate debt, or cover other expenses, using the equity in an inherited property can seem like a practical option. 

But qualifying isn’t always straightforward, and there are some unique factors to keep in mind. Let’s explore what’s involved and what you should know before applying.

What defines an inherited property?

Inheriting a house is when you acquire the ownership of a property because you were named as the heir after someone passed away. Typically, your loved one will name you as the beneficiary of the property in a will or trust. If your loved one did not have an estate plan or a will, you might be awarded property after their estate goes through the probate process. 

When you inherit a home, you might be the only owner of the property, or you might be named as an owner along with others, such as your siblings.

Can I get a home equity loan on an inherited property?

Yes, it's possible to get a home equity loan on an inherited property. Still, you and the property must meet specific requirements. For example, you must be the legal owner of the home to apply for a home equity loan. 

If you co-own the house with another heir, you will both have to agree before taking out a home equity loan. You must also have creditworthiness, such as a good credit score and a low DTI ratio, to be approved for a home equity loan. You must also have at least 15% to 20% equity in the home, depending on the lender.

How to get a home equity loan on an inherited property

There are a few steps you need to take to get a home equity loan on an inherited property:

• Have documented legal ownership: Even if your loved one left the house to you in their will, you still need to have your name on the deed to the house and complete all the probate proceedings. If you have a co-owner on the property, discuss your plans and the purpose of the home equity loan so that you are both in agreement before applying.

• Review the home’s liens: Lenders that issue home equity loans consider the total loan-to-value ratio of the home. For that reason, make sure you know whether or not the house has an existing mortgage (or two). Also, make sure all property insurance and property tax payments are up-to-date and that there are no tax liens or other judgment liens on the property. If the property has an HOA, ensure that all HOA dues are up to date as well.

• Apply for a home equity loan: Once your name is on the deed for the house, you have the agreement of any other heirs (if applicable), and you've verified that there are no outstanding liens on the house, it's time to apply for a home equity loan. Take the time to pre-apply to three to five different home equity loan lenders to ensure that you get the best interest rates and terms for you.

• Get an appraisal: Once you've chosen a lender and applied for a home equity loan, the lender will order an appraisal. Once the appraisal comes back, the lender will be able to determine how much you're able to borrow with a home equity loan.

• Close on the loan: Closing on a home equity loan is a similar process to closing on a mortgage. You will need to pay closing costs, which typically include the appraisal fee, title fees, and other lender-specific costs.

Alternative ways to borrow against an inherited property

If a home equity loan isn’t right for you, you have a few other options to consider if you want to borrow against your inherited property.

Home equity line of credit (HELOC)

A HELOC is similar to a home equity loan in that your home is the collateral for a loan. The difference is that a HELOC is a line of credit, rather than a lump sum payment you receive. You can use the line of credit to borrow money as needed up to a certain limit. As you pay down the loan balance, you can typically borrow money again during the draw period.

Cash-out refinance

A cash-out refinance is when you pay off the loan of your current mortgage by replacing it with a new, larger mortgage and take out the difference in cash. This can help you fund renovations or pay other heirs for their portion of the home. 

Home equity investment

A home equity investment is when a homeowner partners with a home equity company to sell a portion of the equity in their home in exchange for cash. The benefit of this option is that you will have no monthly payments. Additionally, HEI companies have less strict credit requirements than other options on this list.

Reverse mortgage

If you are over age 62, you may qualify for a reverse mortgage, which allows you to access cash from your home without having to repay it. Reverse mortgages tend to come with hefty fees, however, so this is typically a last resort. 

Sell the home

While selling the home isn't technically borrowing against the equity in the home, it's worth mentioning because it's the most straightforward way to access the full value of the home. If you're not interested in living in the house, selling the property is also a way for you to pay other heirs for their portion of the home.

Frequently asked questions

Can I take a loan out on an inherited house?

Yes, you can take out loans on inherited properties. However, the process will be easiest after the title is in your name and the probate process is complete.

What will disqualify you from a home equity loan?

Here are a few reasons you might not be approved for a home equity loan on a house you have inherited:

• Poor credit history: Borrowers typically need good credit to qualify for a home equity loan.
• No title: If you haven't officially received the title to the house in your name or are still in an ongoing probate, you will likely not qualify for a home equity loan until the probate process is complete.
• High debt-to-income ratio: Even if you inherited the home, home equity loan lenders prefer borrowers to have a debt-to-income ratio of under 43%. If you have a high debt-to-income ratio, a lender might not approve you for a loan. Lenders need to see that you can handle an additional payment in your monthly cash flow in order to approve you.
• Not enough equity: To get a home equity loan, you have to have at least 15% to 20% equity in the home. If you inherited a newer house, one with a large mortgage, or if home prices dropped considerably in the area, you might not have enough equity to qualify for the loan.
• Unpaid liens: If you find out that the property has outstanding property taxes or liens against it, you’ll need to resolve them before applying for a home equity loan.

How can you tap into the equity of an inherited home?

You can tap into the equity of a home you inherit in several different ways. There are numerous financial products that exist that enable you to borrow money using your inherited house as collateral. Some common ones include a home equity loan, a home equity line of credit, and a home equity investment, among others. 

Final thoughts

Inheriting a home can be an opportunity to improve your finances, but it can also be emotionally challenging if you acquired the house after losing someone you love. If you decide to leverage the equity in your inherited home to meet other goals, you can take out a home equity loan if you meet the requirements for one. 

If you decide a home equity loan isn't the best option for you, there are several alternatives to consider as well, such as HELOCs or home equity investments. To learn more about home equity investments, which don’t require monthly payments or excellent credit, you can find more information by visiting Point.