Woman with inheritance searching for a way to buy a house.

How To Use An Inheritance To Buy A House

Da'Vonne Duncan5-Minute Read
September 23, 2021

Young millionaires are on the rise!

There are roughly 618,000 millennial millionaires, according to the “Look At Wealth 2019” study by Coldwell Banker. Much of their net worth has been contributed by their baby boomer parents wanting to keep their wealth in the family, and it looks like it’s going to stay that way. In the following decades to come, $68 trillion is expected to be handed down to their heirs. This phenomenon is known as the “Great Wealth Transfer.”

The question is what can you do with this large sum of money? If you happen to strike it rich, it’s a great idea to purchase real estate, whether you want to live there or use it as an investment property. However, it’s not as simple as depositing a check into your bank account. So, here’s what you need to know before using an inheritance to buy a house.

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How An Inheritance Works

Obtaining new wealth can be a wonderful financial opportunity for many, but it can also be devastating. Typically, when someone receives an inheritance, it means your loved one has died. Considering this, the executor of the will (the person responsible for fulfilling the final wishes) oversees the probate process as written in the deceased individual’s will. Then, the estate is divided as directed or split evenly among all heirs if no will is present. Keep in mind, distribution of inheritance also varies by state if the person died without writing a will.

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

Receiving The Inheritance

The process of receiving an inheritance may be lengthy, since a few steps are involved, which could take several weeks or months.

  • Step 1: The executor must assess documents. These documents can consist of insurance policies, titles and deeds, along with the estate plan and will.
  • Step 2: Requires the executor to create a list and calculate the total of all assets listed in the inheritance 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 and the beneficiary will be responsible for them. The recipient will be responsible for capital gains tax on the amount of profits earned from the date of death, not when the assets were originally purchased.
  • Step 3: Previously mentioned, in order to receive the inheritance, all the deceased’s debts need to be paid off. For example, if your grandfather has an outstanding medical bill, you will not be entitled to a cash endowment until the balance is paid off.
  • Step 4: On the behalf of the deceased, the executor will file taxes. Afterward, all taxes must be paid to proceed to the final step. This will prevent the recipient from being held liable for any unpaid debts.
  • Step 5: Once debts are paid off distribution of the assets can occur. Despite securing the inheritance, you may not be able to do whatever you want with the funds. The owner of the will could’ve included conditions on how and when the money is to be used.

During the creation of the will, it’s not uncommon for the owner to include stipulations that reveal who the beneficiary is and how much of the inheritance is to be given. One of the most standard restrictions will require the recipient to be a certain age. Take into account minors can be given an inheritance, but they will not be entitled to the assets until they’re 18 years old in most states. The owner of the will can also set the age to be older than 18 or when they reach a milestone in life. There are other limitations someone can include in their will to avoid the mismanagement of the inheritance.

Instead of lump sum payments, the owner of the will can state that they want their assets to be paid in small installments. On the same note, 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. They are trained professionals who can help you navigate this process to protect your inheritance and build your newfound wealth, by creating a financial plan. They can also help you learn how to use your inheritance to buy a house or make other large investments.

Can You Use An Inheritance To Buy A House?

You can use an inheritance to purchase a home outright with cash or you can put these funds toward a down payment on a loan. Although you can begin the application for a mortgage prior to receiving the inheritance, you will need to receive these funds before closing so the lender can transfer the funds to an escrow account.

The Process Of Buying A House With An Inheritance

An inheritance provides a great source of funding for a down payment or paying for real estate with cash. The lender will expect a great deal of documentation prior to closing, so let’s go over what you will need to prepare you for the process.

1. Confirm The Money Is Yours

An individual will need to prove the money is theirs in order to qualify for buying a home with an inheritance. This can be achieved by showing the lender a letter from the executor and a copy of the will or grant of probate. Within the will, the owner needs to state the funds are nonreturnable. This will demonstrate to the lender that you will be able to afford the property.

2. Provide Proof Of Your Bank Statements

An individual then needs to provide proof of their bank statements. Doing this will 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. Please be advised some lenders may want proof of genuine savings being in your savings account and how long they 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, most lenders don’t require high percentages. Therefore, think through all the financial advantages and disadvantages when deciding to put down a small or large down payment. Majority of lenders will require a minimum of 5 – 20% of the house price. Be mindful, the more you put down, the less you’ll have to borrow. But pick the percentage of the down payment carefully to assure it aligns with your financial goals.

4. Apply For The Mortgage

Even though you have the finances, you still need to meet lending criteria. Lenders generally will require 2 months of bank statements when you apply for a mortgage. This will confirm the inheritance being reflected on your recent bank statements.

Should I Use My Inheritance To Buy A House?

The short answer is maybe, because this could be a wise investment. Many consider purchasing an investment property or investing in REITs, real estate investment trust, to maximize their wealth. This could be a great way for you to build equity, since homeownership is known for expanding capital. Over time, the value of a home could go up, especially when you have the financial freedom for improvements. This can entail renovating the bathrooms or kitchen, as well as enhancing the curb appeal of the property.

The Bottom Line

Homeownership comes with many financial gains, whether you want to invest or purchase your forever home. Therefore, receiving an inheritance is the perfect opportunity to build your wealth. Although it may take some time for distribution, you can still apply for a mortgage and have all your documents prepared for your lender before you receive the inheritance. Be sure to reach out to a financial advisor to establish a financial plan and prevent the mismanagement of your newfound wealth.

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

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Da'Vonne Duncan

Da’Vonne Duncan is a Blog Writing Intern, covering lifestyle topics for the Publishing House. She has a passion for words and enjoys writing scripts, blogs, narratives, and poetry. She holds a bachelor’s degree in Mass Communications with a concentration in digital video production, from Delaware State University.