Buying A House With Inheritance Money: A Complete Guide

If you inherit money from a loved one who passed, you can spend it any number of ways –paying off debt, building up a savings account or investing in the stock market. Depending on your lifestyle and financial goals, you may also want to use your inheritance money to buy a house.

Purchasing real estate can be a great use of your inheritance, whether you plan to live in the home or use it as an investment property. However, it’s not as simple as depositing a check into your bank account. Here’s what you need to know about buying a house with inheritance money.

How An Inheritance Works

Obtaining new wealth can be a wonderful financial opportunity for many people, but it can also be bittersweet. Typically, you receive an inheritance when a loved one has passed away.

Considering this, the executor of the will (the person responsible for fulfilling the deceased individual’s final wishes) oversees the probate process as written in the individual’s will. Then, the estate is divided as directed or split evenly among all heirs if no will is present. Keep in mind, the distribution of inheritance varies by state if the person died without writing a will.

Generally, a will includes all or part of someone’s assets, which may include property, stocks and cash that becomes available to the beneficiaries once the person has passed on. All of the deceased person’s outstanding bills must be paid off before funds are dispersed.

When the will is being created, it’s common for the owner to include stipulations that reveal the beneficiary and how much of the inheritance is to be given. One of the most standard restrictions is that the recipient be a certain age. Minors can receive an inheritance, but they won’t be entitled to the assets in most states until they’re 18 years old. The owner of the will can also designate the age to be above 18 or when the beneficiary reaches a certain milestone in life.

Instead of choosing one or multiple lump-sum payments, the owner of the will can state their wishes to have their assets be paid in small installments. In a similar vein, the will can specify how the beneficiary is supposed to spend the inheritance. For instance, the beneficiary may be limited to using the inheritance to attend college or cover medical emergencies.

Lastly, to be smarter with your money, think about contacting a financial advisor – a trained professional who can help you protect your inheritance by creating a financial plan. They can also guide you on how to use your inheritance to buy a house or make another large investment.

How To Receive Your Inheritance Money

The process of receiving an inheritance can be lengthy, involving the following steps that could take weeks or even months.

• Step 1: The executor must assess documents, which may consist of insurance policies, titles and deeds, the estate plan and will.
• Step 2: The executor creates a list and calculates the total of all assets for probate court. The evaluated total will be the date of death value, which is the fair market value of an inheritance item at the time of the deceased’s death. This is where tax implications come into play for which the beneficiary is responsible for. Specifically, the recipient will be responsible for any capital gains tax on any profits earned from the date of death, not the original purchase date of the assets.
• Step 3: To receive the inheritance, all of the deceased’s debts must be paid off. For example, if your grandfather has an outstanding medical bill, you won’t be entitled to a cash endowment until the balance is zero.
• Step 4: The executor then files taxes on behalf of the deceased. All taxes must be paid before proceeding to the final step, which will prevent the recipient from being held liable for any unpaid debts.
• Step 5: Once debts are paid off, all assets can be distributed to the beneficiaries. Keep in mind that you may not be able to do whatever you want with the funds. The owner of the will may have included conditions dictating how and when the money is to be used.

Can I Use Inherited Money To Buy A House?

Unless there are conditions preventing you from doing so in the will, you can use an inheritance to purchase a home in cash or put toward a down payment on a loan. Although you can begin the application for a mortgage before receiving the inheritance, you’ll need to receive these funds before closing so the lender can transfer them to an escrow account. Be sure to ask your lender whether there are guidelines for how long the funds may need to be in your account before you can use them toward a home purchase.

The Process Of Buying A House With Inheritance Money

An inheritance can be a great source of funding to use for a down payment or buy a house with cash. If you decide to use a mortgage loan, your lender will expect a great deal of documentation prior to closing. Let’s go over what you’ll need to be prepared for the process.

1. Confirm The Money Is Yours

You’ll need to prove the money is yours to be able to buy a home with an inheritance. You can achieve this by showing the lender a letter from the executor, a copy of the will or grant of probate. Within the will, the owner needs to state that the funds are nonreturnable. This shows the lender that you can afford the property.

2. Provide Proof Of Your Bank Statements

Next, you must provide your bank statements to verify that the funds exist. Once again, you can apply for a mortgage prior to receiving the monetary gift. However, the finances must be there by closing. Be aware that some lenders may want proof of genuine savings in your savings account and how long those savings have been there.

3. Determine How Much You Want To Put Down

The thought of putting down a large down payment can make homeownership seem unattainable. Luckily for you, though, most lenders don’t require a high percentage. Therefore, think through all the financial advantages and disadvantages when deciding to put down a small or large down payment.

Down payments can range from no money down to 20% of the house price or more, depending on the loan product. But be mindful: The bigger your down payment, the less money you’ll need to borrow. On the opposite end, the smaller the down payment, the more you’ll pay for the home in interest over time.

4. Apply For The Mortgage

Even with your finances in order, you still need to meet lending criteria. Lenders generally will require 2 months of bank statements when you apply for a mortgage. They’ll also want to make sure your credit history is strong, which you can easily track and monitor using Rocket Money^SM.

Should I Use My Inheritance To Buy A House?

The short answer is maybe. Using your inheritance money to buy a house could be a wise investment, but you might not be ready or interested in being a homeowner. Instead, you might prefer to use your inheritance elsewhere or for another investment.

Let’s take a look at some of the pros and cons of using an inheritance to buy property.

Pros Of Buying A House With Inheritance Money

• Real estate investment opportunities: Many people consider purchasing an investment property with their inheritance money or investing in real estate investment trusts (REITs) to maximize their income and assets.
• A large down payment on a house: You could use your inheritance money for a down payment on your dream home. With more money toward the cost of the house, you might make a larger profit if you sell the house down the road.
• Freeing up funds for home expenses: If you put most or all of your inheritance money toward a down payment on a house, this frees up funds you might have previously set aside to use for home improvements or other expense, like furniture.

Cons Of Buying A House With Inheritance Money

• Money possibly better spent elsewhere: One of the biggest drawbacks of buying a house with inheritance money is that the money could be used for other purposes that might include paying down debt, contributing to a retirement fund or building up your emergency savings.
• The volatile nature of real estate investments: Just like any type of investment, real estate investing also comes with risks, including choosing an unfavorable location, issues with tenants, the unknown costs of regular property maintenance and the unpredictability of the real estate market.   

The Bottom Line

Buying a house can be a great way to use your inheritance. Especially if you were already interested in real estate, having the extra funds provides a unique opportunity to expand your assets, generate passive income and build equity.

Although it may take some time to receive an inheritance, you can still apply for a mortgage and have all your documents prepared for your lender before the inheritance money is in your hands. Be sure to reach out to a financial advisor to establish a plan and prevent the mismanagement of your newfound wealth.

If you’re thinking of using your inheritance to buy a house, get started on the mortgage approval process today.