How to use a home equity loan on an inherited property

An inheritance, especially inheriting a home, often comes with big decisions, particularly if there are multiple heirs. But you have more options than you might expect. A home equity loan or home equity line of credit (HELOC) on inherited property could be one of them. 

One common use is a sibling buyout loan, or inheritance buyout loan. This is when one heir borrows against the equity in the property to pay other heirs for their ownership interests. This could offer a path for you to keep the home while giving your co-heirs their share of the property’s value.

The process generally involves resolving the estate and title, determining the home’s value, calculating each heir's share, and applying for financing. We'll go over each step, including how the buyout amount is calculated and tax considerations to discuss with a professional. 

This article is for educational purposes only. Achieve does not provide legal or tax advice. Consult an estate attorney for specifics on your situation.

Can you get a home equity loan on inherited property?

Yes, a home equity loan on inherited property might be available once you have an ownership interest and the lender can establish its lien against the home.

The timing typically depends on how the property was transferred. If the home is going through probate, the estate might need to complete certain steps before you can obtain a clear title or otherwise establish the ownership and lien rights a lender requires. A trust or other estate planning arrangement could follow a different process.

If the inherited home still has a mortgage, that balance reduces the equity available to you. It’s important to understand how a home equity loan works and how your home serves as collateral before considering this option.

Resolve the estate and title first

Before applying, find out how the property will transfer to you and the other heirs. Probate, the court-supervised process of settling someone's estate, might be required. Inherited property doesn’t always follow the same process. A trust, beneficiary deed, joint ownership arrangement, or other state-specific procedure could affect when and how ownership changes.

For a lender, the key question is usually whether the ownership and title documentation are sufficient for the home to serve as collateral. If multiple heirs currently own the property, the lender might also need to address their ownership interests and obtain any required signatures.

If the inherited home still has an existing mortgage or home equity loan, that's generally a separate consideration from obtaining new financing. 

Using a home equity loan for a sibling buyout

A sibling buyout loan could help one heir pay the other heirs for their ownership interests in an inherited home. A buyout can be done through a cash-out refinance, standard home equity loan, or estate loan. Once the buyout is complete, the heir keeping the property becomes the sole owner, subject to any existing or new liens.

Start by agreeing on the home’s value. An appraisal or another valuation that all parties accept could provide a basis for the buyout amount. Then determine each heir’s ownership share, account for any mortgage or other debt secured by the property, and agree on how the buyout should be handled.

The loan and title transfer could be coordinated as part of the same transaction. The right sequence depends on the estate, title documents, state law, and lender requirements. 

How lenders evaluate multiple heirs

When multiple heirs own an inherited property, lenders need to confirm who holds title and who has the authority to use the property as collateral. Depending on the ownership structure and loan arrangement, other owners might need to sign documents, participate in the loan, or transfer their ownership interest as part of the transaction.

The lender might also review the borrower's income, credit, existing debt, property value, and available equity. Requirements vary by lender and could depend on how the inherited property is titled.

If you plan to go the buyout route, work with the estate attorney, title professional, and lender early in the process. When everyone is aligned early, you’ll have a clearer picture of the title and financing. Review home equity loan requirements for more on the factors lenders consider.

How the buyout amount is calculated

A buyout amount generally starts with the home’s agreed-upon value, minus any mortgage or other debt secured by the property. What’s left represents the equity in the home. Apply each heir’s ownership percentage directly to that equity to determine their share.

Say a home is worth $500,000 and has a $100,000 mortgage. That leaves $400,000 in equity. If three siblings each own one-third of the property, each sibling’s share is about $133,333.

If one sibling wants to keep the home, they would generally need to pay the other two siblings about $266,667 in total, before accounting for closing costs or other adjustments the heirs agree to. The final amount can change when ownership shares aren’t equal or when the heirs account for expenses, liens, taxes, or other property obligations.

Tax considerations

Inherited property generally receives a tax basis equal to its fair market value at the date of the decedent’s death, although special rules and an alternate valuation date could apply in some estates. That basis may affect the capital gain or loss if you later sell the property.

A sibling buyout could raise additional tax questions because the heir keeping the home is acquiring another ownership interest. The IRS says the cost of a home can include amounts paid to acquire an interest in a qualified home. Interest on a mortgage or home equity loan might also be deductible when the borrowed funds are used to buy, build, or substantially improve the home, subject to applicable requirements and limits.

That doesn’t mean every inheritance buyout loan automatically qualifies for an interest deduction. The tax treatment could depend on the transaction, how you use the property, how the debt is structured, and other requirements.

Tax law is complicated, and inheritances can make it more so. Consult a tax professional to learn about your options and potential liabilities.

Buy out heirs with a HELOC through Achieve Loans

If you qualify and the inherited property meets the lender's requirements, an Achieve Loans home equity line of credit (HELOC) could be an option for funding a sibling buyout. With a fixed-rate structure, your rate stays the same over the life of the loan.

Before applying, it helps to know how the estate and title will be handled and whether the property meets the lender's requirements.

Find out if you're eligible through Achieve Loans. You can check for prequalification with a soft credit pull that won't hurt your score.