How To Handle a Home Equity Loan on Inherited Property

Dealing with the loss of a loved one is always difficult. But when that person leaves behind a home with an outstanding home equity loan, it can create extra stress and uncertainty. As the beneficiary, you may be wondering what obligations you have when it comes to repaying the loan and whether you’ll be able to keep the home.

In this comprehensive guide, I’ll explain how inherited home equity loans work, what your options are, and how to make the best financial decision for your situation

Overview of Home Equity Loans

Before diving into the specifics around inherited home equity loans, let’s review how these products work in general:

• Home equity loans allow homeowners to borrow against the equity in their home (the current market value minus any mortgage debt)

• The loan provides a lump sum of cash upfront, which is repaid with fixed monthly payments over a set number of years.

• The home acts as collateral, meaning if payments stop, the lender can foreclose.

• Interest rates are fixed, unlike home equity lines of credit which have variable rates.

• Loan amounts are usually up to 80% of the home’s value, although an inherited property may have less equity available.

• Homeowners can use funds for any purpose – debt consolidation, home improvements, medical bills, etc.

Now let’s look at what happens when a home with an outstanding home equity loan is left to beneficiaries.

What Are Your Responsibilities for the Loan?

First and foremost, you need to find out if you’re personally responsible for repaying the deceased’s home equity loan. There are a few possibilities:

• You’re named on the loan – If you were a co-signer, you’re fully responsible for repayment. The lender will look to you to make the monthly payments or repay the loan in full.

• You’re not on the loan – Legally, you have no obligation to pay the debt. But the lender can still foreclose if payments stop.

• Loan is insured – Some loans have insurance that pays out upon death. This covers the outstanding balance so you’re off the hook.

• Estate is liable – Unpaid debts are paid from the estate before any inheritance. The home can be sold to settle the loan.

Consult an estate attorney to understand where you stand. Don’t rely solely on what the lender says.

Options for Handling an Inherited Home Equity Loan

Once you know your rights and responsibilities, you can weigh your options:

Pay off the loan – If you have enough cash on hand from other inheritance or assets, you can pay off the loan and own the home free and clear.

Take over payments – As long as you qualify with the lender, you can assume responsibility for monthly dues and retain ownership.

Refinance the loan – Take out a new loan in your name to pay off the existing debt. This builds credit history.

Sell the home – To avoid loan obligations, you can sell the home and use proceeds to repay the lender.

Let lender foreclose – If the home has no remaining equity, walking away may be the best option.

Rent the home out – If allowed by your loan terms, renting can provide income to help cover the monthly payments.

Make sure you understand all the costs, benefits, and risks before making any decisions.

Tips for Refinancing an Inherited Home Equity Loan

Many beneficiaries find refinancing the smart way to take ownership of an inherited property while getting a better deal on interest rates and terms. Here are some tips for going this route:

• Check your credit score – You’ll need good credit to qualify for the best refinance rates. Pay down debts and correct errors on your credit reports first if needed.

• Research lenders – Compare offers from multiple mortgage lenders. Look for low interest rates and minimal fees.

• Pick a fixed rate – Adjustable rate mortgages have more risk. Choose a fixed rate for stability.

• Watch closing costs – Closing costs can reach 5% of the loan amount. Factor these in when choosing the best deal.

• Consider a HELOC – It may offer more flexibility than refinancing if you need access to equity.

Refinancing requires research and diligence to get right. But it allows you to access the equity without selling.

Using a Home Equity Loan to Buy Out Siblings

A common use case for an inherited home equity loan is needing cash to buy out other beneficiary siblings’ ownership stakes. Here are some tips if this is your goal:

• Get an appraisal to determine current market value for negotiating buyout amounts.

• Determine fair buyout prices based on each sibling’s fractional ownership interest.

• Only borrow what you need to pay siblings, not the maximum.

• Pick the longest term possible to keep payments affordable.

• Make sure your income can cover the new loan payment plus existing expenses.

• Consider gap funding options if your loan falls a bit short.

• Have an attorney review the buyout agreements before finalizing.

With careful planning, home equity loans can resolve inheritance disputes and allow one beneficiary to retain the property.

What to Do if You Can’t Afford Payments

Even with good intentions, sometimes taking over an inherited home equity loan becomes unaffordable. If you realize payments are stretching your budget too thin, you may need to consider alternatives like:

• Selling the property to repay the loan and free up cash
• Negotiating a short sale if the home won’t sell for enough to cover the debt
• Deeding the property back to the lender in lieu of foreclosure
• Listing the home for rent to generate income to help cover the mortgage
• Refinancing into a lower monthly payment if you qualify

Don’t wait until you’ve missed multiple payments and damaged your credit. Consult a housing counselor or attorney for guidance as soon as you suspect trouble making ends meet.

Closing the Loan After Selling an Inherited Property

If you opt to sell the inherited home rather than keep it, you’ll need to close out the home equity loan properly. Be sure to:

• Pay off the full loan balance after the home sale closes.
• Notify the lender immediately that the debt is repaid.
• Submit a written request to the lender to release their lien and send you the cancellation documents.
• Keep the lien release letter for your records in case any issues arise down the line.
• Get the title company to handle recordation of the release with the county for you.
• Forward the closing disclosures to the lender as proof the loan is paid.
• Cancel any insurance policies on the property which were required by the lender.

Following this process ensures you tie up all loose ends and walk away debt-free.

Consulting Professionals About Inherited Loans

Given the complexities involved, it’s wise to seek guidance from financial and legal professionals when inheriting a home with an outstanding loan. Here are some experts worth consulting:

• Estate attorney – Can advise on the legal obligations for repaying debts and navigate estate issues.

• Housing counselor – Provides guidance on keeping inherited property or selling.

• Mortgage broker – Helps find the best refinance rates and terms if going that route.

• Tax professional – Has insight on inheritance/estate tax implications.

• Real estate agent – Assists with selling the property for the best price if needed.

Don’t go it alone. The right professionals make the process smoother.

Questions to Ask When Inheriting a Home Equity Loan

If you’re inheriting property that’s tied to a home equity loan, here are some key questions to ask:

• What debts are still owed on the property? Request detailed documentation from the lender.

• What is my exact legal obligation to repay the loans? Get clarity from estate attorney.

• How much equity exists in the home based on current valuations? Check comps.

• What are all the costs if I refinance the loan myself? Get closing cost estimates.

• How does taking on the loan impact my debt-to-income ratio? Crunch the numbers.

• What are my alternatives if I can’t afford the monthly payments? Consult a housing counselor on options.

• What are the tax consequences if I sell the home? Speak to a tax pro.

Getting answers equips you to make the soundest financial decision.

Key Takeaways on Inherited Home Equity Loans

Dealing with a home equity loan on an inherited property can certainly be complicated. Here are some key tips to remember:

• Confirm whether you’re personally liable for repaying the debt or not.

• Make sure you understand all your options before deciding what to do.

• Refinancing the loan into your name may allow you to keep the property.

• Seek help from financial and legal professionals throughout the process.

• Ask the lender detailed questions and get any promises in writing.

While an inherited home equity loan presents