Trust vs. Will: How Transferring Property Affects Your Mortgage Options

Trust vs. Will: How Transferring Property Affects Your Mortgage Options

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The majority of property holders make a written, formal plan for what will happen to their property when they die. This virtuous piece of writing is referred to as a will and is one of the most important components of planning for the future. It serves to reduce uncertainty and allow their money to go to their loved ones as they would have wanted.

Property owners have several options in this regard, but living trust and will are the most common ones, and, both, as you would expect, have pros and cons. But they have varying effects on property transfers, especially where there is a mortgage.

Property transfer is a key decision that plays a significant role in mortgage decisions. You ought to understand how a trust differs from a will, as it can help you optimize your financial plan and make informed decisions. Your decisions should be based on your goals.

Discover how each approach affects your mortgage options and find the optimal strategy for your specific situation.

Will vs Trust: An Overview

A will is a document in writing that sets out how your property shall be divided when you pass away. It only comes into operation when the property owner has died and is usually used in simple estates or where there are children who are to be appointed guardians. A will must be probated, which may be something public and a lengthy process.

A trust is a contractual arrangement by which property is placed in the hands of a trustee to hold and disburse according to the instructions of the grantor. It may be operative during the lifetime of the grantor or upon death, providing flexibility and confidentiality. They are normally employed in more complicated estates or to evade probate.

 

Also Read: Inheriting a Property with a Mortgage: What Are Your Options?

Transferring Property with a Mortgage to a Trust

You are able to transfer a mortgaged property to a trust but with careful consideration of your mortgage’s due-on-sale clause. The clause allows the lender to call for the entire loan to be paid in case the property is sold or transferred.

But under the Garn-St. Germain Depository Institutions Ac of 1982, disposal of a property into a trust where the borrower is to remain a beneficiary doesn’t trigger this section.

Key Considerations for Property Transfer

Due-on-Sale Clause

  • Effect: Transfers to trusts usually will not trigger the due-on-sale clause, but review your mortgage contract for compliance.
  • Legal Advice: Your case could have special needs. Seek the advice of a legal professional to learn about your case and to make sure that the transfer does not unintentionally activate the clause.

Tax Implications

  • Property Taxes: Placing property into a revocable living trust typically won’t affect property taxes. Some states have special titling requirements to maintain exemptions like the homestead exemption.
  • Transfer Taxes: Property drafted transfers to a trust must not be subject to transfer taxes.

Probate and Privacy

  • Probate Avoidance: Trusts enable assets to transfer to beneficiaries without probate, which is time-consuming and expensive. This is particularly useful for mortgaged homes, as it can ease the transfer of the house for inheritors.
  • Privacy: Trusts maintain the division of assets confidential, unlike wills, which are open to the public during probate.

Will vs. Trust: What’s Best for You

  • Simplicity and Expense: If you have fairly simple estates and little in assets, a will might suffice. But if you have many assets or want to manage them while you’re still alive, a trust would be preferable.
  • Complex Estates: Trusts offer greater control over the distribution of the assets and can protect the assets from creditors, thus being the best for complex or large estates.

Conclusion

In deciding between a mortgage transfer of real estate and a will, trusts are superior to wills in numerous ways, including avoiding probate and maintaining confidentiality. The due-on-sale clause, however, must be approached with caution and local laws adapted to it. Finally, using both a will and a trust can give you complete estate planning, your wishes are upheld, and your heirs have fewer financial and legal problems.

Inheriting a property with a mortgage: what are your options

Inheriting a Property with a Mortgage: What Are Your Options?

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It is never easy to put up with the loss of a loved one, and things can become even more difficult if you inherit a mortgaged property. For most folks, a home is the most valuable asset they have to pass on to their loved ones after their demise. However, the real question is – inheriting a property with a mortgage and what are your options?

There is no point in sugarcoating things. Inheriting a mortgaged property means you have to make a few tough decisions. You can either choose to sell it to pay off the loan or keep it and decide how to manage the mortgage situation. Understanding all available options will help you make the best choice for your situation.

What to Expect After Inheriting a House with a Mortgage?

Usually, most people inherit assets either through a last will and testament or probate. If you inherit a mortgaged property, you have two choices: sell it or keep it and assume the mortgage responsibility. Of course, both decisions have exclusive advantages and disadvantages.

Selling the Asset

Do you need the home? If you have a place to stay, you can sell your inheritance and pay off the existing home loan. Also, keep any remaining cash as part of your inheritance. The best thing about this option is that it frees you from having to worry about the mortgage or maintaining the house. However, you might have to pay capital gains taxes on any money you receive unless you qualify for an exclusion.

Keeping the Asset

If you decide to retain your inheritance, you have to assume responsibility for the mortgage and start making payments sooner rather than later. The Garn-St. Germain Depository Institutions Act lets most heirs assume the mortgage without any closing costs or credit checks. Then again, taking this route means you have to take over the mortgage payments along with the taxes, insurance, and other expenses. Additionally, you will have to oversee upkeep and maintenance.

 

Also Read: Refinancing an Inherited Property: What You Need to Know

4 Steps to Take After Inheriting a Mortgaged House

Inheriting a property with a mortgage: what are your options? Well, it is a complex situation and needs equally complex solutions. You also need a proper understanding of what you are getting into. Below, you will find a list enumerating and explaining four steps to take after inheriting a mortgaged property.

  1. Get in Touch with the Loan Servicer

You have to keep making monthly mortgage payments while weighing your options. If the mortgage payments stop altogether, you will be heavily penalized. You will even be at risk of losing the home to foreclosure.

Therefore, the first thing you need to do is to find out the loan servicer. Reach out to notify them of the death. The mortgage servicer will possibly ask you to provide them with a copy of the death certificate and will. After verifying this information, the servicer can brief you about the remaining loan balance and monthly payments.

  1. Calculate the Equity

Before you decide what to do with your inheritance, you have to ascertain its worth. Consider getting the house appraised. It should give you an idea of what price you could list it for on the market.

Once you know the value of the property, you will subtract any first or second mortgages or outstanding liens. The final number you get is the asset’s equity and the amount you can expect to receive after selling it.

Make sure to calculate the potential cost of selling the house as well. For instance, does it need any major or minor repairs before you can put it on the market? Even if no additional work is necessary, you have to pay the closing costs and additional fees if you decide to sell.

  1. Consider Your Expenses

If you are planning to keep the house, remember to do the math to determine how much it will cost you. Apart from mortgage payments, you have to think about property taxes, utilities, landscaping, and a few other costs.

While inheriting a mortgaged home can be quite a windfall, it does come with risks. A house needs ongoing maintenance and maybe a few significant repairs. These things will only add to the financial strain. Property inheritances can also have tax implications, such as property tax reassessments and potential capital gains taxes if the house is sold at a profit.

  1. Consider Other Heirs

If the deceased willed the entirety of the property to you, you get to decide what to do with it. However, if other beneficiaries inherit a portion of the house, you must work with them to decide what to do. For instance, siblings may inherit the house with a mortgage after a parent dies.

If you wish to move into the property yourself, you can buy out the other heirs of their shares. This process is called an estate buyout, which requires an appraisal to determine the home’s exact value. You and the other heirs can also agree to sell the home and split the remaining proceeds.

Is Refinancing an Option

Inheriting a property with a mortgage: what are your options? You already have a few to consider, but what about refinancing the mortgage? Is that an option, too? Refinancing will prove to be worthwhile only if you can lower the interest rate or make the monthly mortgage payments more affordable.

However, if you decide on refinancing, you have to qualify for it first. It depends on your credit score, debt-to-income ratio, and home equity. If you have planned to sell the house within the next few years, remember that the refinancing costs will possibly outweigh all benefits.

Whatever you decide to do, know that our services can be of great use when you inherit a property with a mortgage. We are ALT Financial Network, Inc., and we can assist individuals who inherit mortgaged property by offering tailored mortgage refinancing solutions. Our licensed mortgage professionals can guide you through options like loan term adjustment or securing favorable interest rates. We will ensure the inherited property remains a valuable asset.

FAQs

Q1. Can a lender force the sale of an inherited property with a mortgage?

A1. In most cases, lenders cannot force the immediate sale of an inherited home. The Garn-St. Germain Act allows heirs to assume the mortgage, preventing foreclosure as long as payments continue.

Q2. What happens if multiple heirs disagree on keeping or selling the property?

A2. When multiple heirs inherit a mortgaged property, disagreements can arise. Options include a buyout of shares, legal mediation, or selling the home and splitting proceeds to resolve disputes fairly.

Q3. Will inheriting a mortgaged home affect my credit score?

A3. Inheriting a home doesn’t directly impact credit scores. However, assuming the mortgage and missing payments could hurt your score, while consistent payments may improve your credit history over time.

Q4. Are there tax benefits to keeping an inherited home?

A4. Yes, heirs often benefit from a stepped-up cost basis, reducing capital gains taxes if sold later. Also, mortgage interest and property taxes may be deductible if the home is retained.

Q5. Can I rent out an inherited home with a mortgage?

A5. Yes, you can rent out an inherited home, but check mortgage terms and local regulations. Some loans require owner occupancy, while rental income may help cover mortgage payments and upkeep costs.

Hard-Money-Loans-What-Are-They-and-How-Do-They-Work

Hard Money Loans: What Are They and How Do They Work?

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Are you a business owner or real estate investor seeking easy, flexible financing? You may opt for a hard money loan.

Hard money loans are popular in real estate investing, especially for property flippers or individuals handling short-term projects. Consider them an alternative to traditional loans that do not focus on your creditworthiness or financial history and instead look into the value of the property you’re borrowing against.

Here is an introductory guide explaining hard money loans, how they work, and who they are suitable for.

What is a Hard Money Loan?

Hard money loans are a short-term, asset-backed financing option in real estate transactions. They are based on the property’s (being renovated or purchased) value, unlike traditional loans, which rely on the borrower’s credit score and financial history. While it benefits the borrower with an easy process, the asset is collateral in a hard money loan, which provides more security to the lender than a traditional loan, making it a balance of advantages for both the borrower and the lender.

Hard money loan lenders are, generally, private investors or companies, not conventional banks. They streamline approval and funding processes, so these loans are perfect for real estate investors looking for fast cash access and not waiting for weeks or months for loan approval.

Key Takeaways

  1. They are a short-term loan type spanning 6 to 36 months
  2. They are collateral-based, backed by the asset renovated or purchased
  3. Private lenders, companies, and individuals are usually hard money loan lenders
  4. Their interest rate is higher than traditional loans to counterbalance the lender’s risk

How Do Hard Money Loans Work?

A hard money loan differs from conventional financing, typically surrounding the property’s value rather than being fixated on the borrower’s financial profile. Here is a look at how it works.

Property Valuation

The property you are borrowing against requires evaluation to initiate the process. The lender determines the property’s potential value, especially after renovations (after-repair value/ARV), and offers a loan amount depending on a percentage of the asset’s ARV, called a loan-to-value (LTV) ratio.

LTVs for hard money loans are usually between 60% and 70%. So, if your property’s ARV is $500,000, a lender might offer $300,000 or $350,000.

Approval

After the property’s evaluation, the loan is approved based on its value rather than your credit score, facilitating faster approval than a conventional one. Expect approval within a few days.

Down Payment and LTV Ratio

One drawback of hard money loans is that they usually have a higher down payment than conventional loans. It helps reduce risk for lenders.

A borrower must have 20% to 30% of the property’s purchase or after-repair value, ensuring the lender has a financial buffer if necessary. For instance, if the property value is $500,000, you may have to put down $100,000 or $150,000.

Also Read: What Is an FHA Commercial Loan?

Repayment Terms and Monthly Payments

Hard money loans typically need a high down payment, ranging from 6 to 36 months. Many lenders offer interest-only payments, which means your monthly payments will only cover the loan interest. The end of the term requires the borrower to pay a balloon payment, covering the full principal loan amount.

If you are an investor and want to sell or refinance the property before the end of the loan term, it can be of huge advantage to you. However,  failing to sell or refinance the property can result in a financial situation, as you would be expected to make the balloon payment when the term ends.

Who are Hard Money Loans For?

They are perfect for real estate investors or business owners who need cash fast and are willing to accept higher costs and risks. Here are circumstances where a hard money loan could be beneficial:

  • Flipping a Property: Flippers (real estate investors who buy homes to renovate and resell) generally use hard money loans the most. They need quick access to funds to acquire and improve properties before making a profit by selling them. Since these loans are short-term and involve fast approval, they are perfect for flippers.
  • Buying a Foreclosure: Foreclosure properties usually require quick purchases at auctions. Since conventional loans are long-term and approval takes longer, hard money loans become a viable solution for fast cash.
  • Bridge Loans: A hard money loan enables you to buy or renovate a property while waiting for your permanent financing to be ensured. It acts as a bridge between long-term financing attempts and immediate funds.
  • Borrowers with Bad Credits: If your credit score is poor or you don’t have a robust financial history, hard money loans can be of great help because they focus on the property value over everything.

Conclusion

Hard money loans draw in a specific group of people seeking loans—those looking for fast cash access and are ready to face the higher costs and risks. For real estate investors, house flippers, business owners, and borrowers with poor credit, this type of loan is ideal. If you’re in a hurry and want a hard money loan from a reputable lender offering competitive interest rates and a better overall offer, call ALT Financial without hesitation.

Refinance-an-Inherited-Property

Refinancing an Inherited Property: What You Need to Know

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Did you inherit a house? The feeling can be amazing, but the financial decisions and responsibilities that come with it can quickly feel overwhelming, especially because the property was passed down to you by a loved one. Why not consider refinancing it? It could lower your monthly mortgage payments, or you could make necessary repairs with built-up equity.

Before you go ahead, here is everything you need to know about refinancing your inherited property.

Did You Inherit a House With a Mortgage?

It isn’t fortunate if you have inherited a house with a mortgage. A mortgage is a lien against the asset as security for the money borrowed to purchase it. The mortgage needs to be repaid—not paying could result in foreclosure.

If there is a co-signer or co-borrower on the loan, they are responsible for repaying it. Once you have been named the executor, you become responsible for handling any remaining financial obligations and ensuring beneficiaries receive their assets. You will continue making mortgage payments using funds from the estate.

If you are the sole heir of the property, you have several options:

  • Assume the mortgage and continue making payments
  • Clear the debt
  • Sell the property
  • Refinance

However, if you are one of the several heirs, all co-heirs should work with the estate executor and the mortgage lender to decide the property’s future. The mortgage may include a due-on-transfer or due-on-sale clause that needs full loan repayment before a change in ownership.

Lenders cannot enforce this clause in some scenarios, such as if the borrower dies and the property is passed to their children, the property is transferred to a living trust with the borrower being the trust’s beneficiary, or in case of legal separation like divorce.

What if You Inherited a House With No Mortgage?

Maybe you inherited a house with no mortgage. In that case, you own 100% of the property’s equity. While you can use that to your advantage, you need to contact a lender and meet their requirements for a new loan.

How to Refinance an Inherited House

An inherited property can be refinanced in different ways. When refinancing, you must continue making monthly mortgage payments. Here are some refinancing options:

Probate Loan

This loan is a cash advance provided by the lender while the estate undergoes probate. The lender will receive your inheritance after probate proceedings. To apply for a probate loan, you need:

  • The requested amount and purpose
  • Order for probate
  • Inventory and property/appraisal address
  • Petition for probate
  • The death certificate

The lender will review your application after you submit it, and the cash can take up to two weeks to show in your bank account. You may take out a probate loan on the available equity in the home, which you can use to buy out other beneficiaries.

Rate-and-Term Refinance

This refinancing option allows homeowners to change the term and interest rate of the present loan by using a new mortgage to replace it. A rate-and-term refinance helps lower monthly payments or can be used to shorten the loan term without changing the principal balance. It is a good option for solo heirs to the inherited home, not properties with co-heirs.

The house and mortgage must be in your name before you start shopping for lenders. You can refinance once it is transferred to you.

These are the primary steps to rate-and-term refinance an inherited house:

  1. Check credit score: You need a FICO score of at least 620 (varies for every lender).
  2. Check multiple lenders: The best refinance rates and the lowest fees come from comparing different lenders.
  3. Apply for a refinance: You can apply with several lenders. Your credit score will have minimal impact.
  4. Compare Loan Estimate documents: Doing so will tell you how much you will need for closing costs.
  5. Lock your interest rate: Your interest rate won’t change for some time once locked.
  6. Close on your new loan: Closing on a refinance is like closing on a purchase loan. You have to pay closing costs.

Also Read: Are Property Taxes Included in Mortgage?

Cash-Out Refinance

This refinance option gives homeowners a new loan for more than what they owe. The difference is paid in cash, which can be used to improve the home, consolidate debt, or meet other financial obligations. You may also use it to purchase the inherited home and pay off the remaining heirs.

A cash-out refinance has a few requirements, including:

  • It requires the homeowner to have at least 20% equity in the home.
  • Your inherited home’s value determines the amount you can take out, which you will find out after a home appraisal. A lender should generally let you take out about 80% of the home’s value (depending on the lender and your situation).
  • Your name must have been on the title of your inherited property for a minimum of 6 months before you can do this refinancing.

Conclusion

Now that you have a clear idea of how to refinance an inherited house, choose a reliable mortgage broker to help you and make the process seamless. Talk to the experts at ALT Financial.