When a homeowner passes away and leaves the property to one or more heirs, the estate holds the property for distribution after the payment of any debts or outstanding loans on the property. This situation implies that the heirs cannot take ownership of the house until the settlement of the existing mortgage. Also, there could be a clause within the loan to complete full payment before property transfer. These scenarios may lead one to refinance the inherited property.
Refinancing involves replacing current mortgage with a new loan, with FHA Cash Out refinancing and conventional refinancing as two of the possible variants. One can go with refinancing owing to the following reasons:
- Cash-Out Refinance: Cash-Out is the difference between the new loan at a lower rate and the house’s appraised value. This Cash-Out can be used to re-invest in the house, for remodeling to increase profit. Else, this is used to consolidate high-interest debts, such as the outstanding balance on credit cards. Further, the proceeds are tax-free, thus making this option more alluring.
- Lower monthly payments: With reduced current rates compared to the rates when the house was purchased initially, there is a reduction in monthly payments.
- Reduced rates: Refinance leverages fixed interest rates. Though this does not bring in significant change, yet it ensures a fixed amount as a monthly payment, unlike the variable rates where monthly payments fluctuate with the rates.
This article discusses how to refinance an inherited property using FHA Cash-Out refinancing.
FHA Cash-Out Program
The Federal Housing Administration (FHA) gives insured mortgages for cash-out refinance if the borrower is prepared to live in the concerned property for 12 months as a general rule. It is required to settle all payments in the due month before mortgage disbursement. This option appeals to those with fair-to-good credit scores and who wish for minimal down payments.
However, the FHA Cash-Out mortgage needs mortgage insurance. The insurance premium protects lenders from default borrowers.
The eligibility criteria are similar to that when applying for an FHA loan. Following are the basic criteria while opting FHA Cash-Out refinancing in case of inherited property:
- A lawful resident of the U.S. with a valid SSN
- Must meet the legal age criteria to sign a mortgage in the respective state
- A regular employment history
- The minimum credit score to be 620
- Property to be the primary residence that has been assessed by an FHA-approved appraiser
Also, according to FHA, an inherited property eligible for Cash-Out must have the lenders and borrowers adhering to FHA requirements.
Refinancing Inherited Property with Multiple Heirs
If one wishes to get the title of the inherited property that has multiple heirs, refinancing can help to achieve it. The proceeds of refinancing can be used to pay each of the heirs their share. The person’s share could be used for a down payment to avoid cash deposit at the time of closure.
It’s best to ask a lawyer and a loan office while refinancing an inherited property, for a smooth course of action. This makes sure that all the respective state and federal laws are followed strictly.