What type of loan is best for this situation/advice?

4 Replies

Hello,

A family member has a somewhat 'unique' situation coming up dealing with an estate and I thought I would jump in here to help them get some advice.

Situation is this; they (family member) are one of three siblings who all were given equal shares of a paid in full home when the last parent passed away. The other two siblings have no interest in the house and are willing to sell their 'shares' for a very fair price. The house is 'assessed' for tax purposes for about 90K. It would honestly need about 10K-20K of work to sell for that price. 

Let's say for 'simple math' that the three of them agree that it is worth 54K as it sits, or 16K per sibling. So it would take 18K * 2 = 36K for the third sibling to buy the other two out. So, in theory, they would be able to be 'all in' or 36K purchase + maybe 14K of rehab, or a total of 50K for a house that would then be worth about 90K, leaving them with about 40K in equity. 

How would conventional lenders see their 'skin in the game' in this situation? I know that in most situations a borrower would need to bring in a share of 'down payment'. But in this case, does at least the 18K of already owned equity play a role towards that requirement? 

Thanks, Dan Dietz

Equity is the difference between whatever the property is worth and the amount of debt secured by the property.  If there is no debt, that is the property is owned free and clear, then the entire value of the property is equity.

If the sibling in this example wants to use the property as collateral for a loan to purchase the other siblings' equity shares, then this will most likely be treated as a refinance.  If the maximum loan the lender will give on the property is 75% of value, then the largest loan a lender will give a borrower for a property that appraises for $54K is $33,750.  If this is the case, then the borrower will have take cash out of pocket to pay the other two siblings a total of $36K.

@Dave T ,

I get what you are saying, and thanks for the help. For clarification though, if I am understand it right, wouldn't the amount that could be borrowed in this case be 54K appraisal * 75% = $40,500? 

As a follow up, IF the house appraised for say 70K, would that mean that potentially they could borrow 70K * 75% = $52,500 and use that for 36K purchase, 14K rehab, and keep the 20K as 'cash out'? (assuming that the property cash flowed at that amount etc....)

Thanks, Dan Dietz

@Daniel Dietz  You're on the right track...

Per Fannie & Freddie guidelines, there are no seasoning requirements for cashing-out an inherited property, so you're good there. For more info, see here. And here.

Technically speaking--in order to keep the property while using the proceeds to payoff the other heirs--the transaction is both a refinance and a purchase. To that end, the heir keeping the property can usually use her share of ownership in the property as her down payment or equity in the transaction to avoid bring cash to the table.

Sorry my response is so generic, but hopefully it helps!

@Daniel Dietz  

You are right.  I guess I had a dyslexia moment and keyed in $45K instead of $54K.

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