This is the most comprehensive guide to using inheritance as a deposit.
In this expert-written guide, you’ll learn everything you need to know, including the steps required; how to work with banks when buying a house with inheritance money, and the technical processes.
So if you’ve just been given an inheritance and are unsure where to start, you’ll love this guide.
Let’s dive right in.
Getting an Inheritance & where to go from there
Inheritance is often an unplanned gift for most of our clients.
Due to it being one of the rarer, irregular situations, there’s not a lot of information about this process.
That’s where we come in.
In this section, I’m going to go through how getting an inheritance works and where to go from there.
How does getting an inheritance work?
Let’s start by understanding the jargon around inheritances.
First, there is an “estate”.
An estate can be defined as the assets belonging to the person that passed away.
Often the estate is divided in the deceased’s will, which will be appointed by the executor of the will. However, if there was no will in place, the estate will be divided evenly by the court who will choose an administrator.
Once the estate has been divided, before the transfer, remaining debts will be paid out, and then assets will be distributed.
In most cases, how inheritance is paid comes down to the fine print.
This can influence how the amount is paid, – for example in small instalments instead of a large sum – or also put a restriction towards what the inheritance is used.
(Or sometimes inheritances can only be used for education purposes)
Terms can also include the money being released after certain milestones have been achieved like a university or high school graduation.
Where to go from there?
The time frame of when you will receive your inheritance varies greatly, it can sometimes be a time consuming and lengthy process.
The positive is once the money has been released into your account it is yours to do with as you please.
Using an inheritance as a deposit
Inheritance can certainly be used as a deposit towards buying a home.
(The reality is an inheritance can be used for lots of things)
But there are a few factors you need to be aware if you are going to use it get you into the property market.
In this chapter, we’re looking at how inheritance can be used as a deposit and what exactly you need to know.
What do I do when I get an inheritance?
Once you have received an inheritance, you can use that money towards putting down a deposit and buying a property.
There are a few items you need to be aware of before you start making offers on houses.
In particular, 2 important factors that most banks want to confirm before they will give you a home loan.
1. Prove the inheritance payment is non-refundable
To qualify for a home loan using inheritance, the payment must be non-refundable, and you need to be able to prove it.
Anything like a letter from the executor to confirm details of the amount and when it was given to you as a beneficiary will do.
In some cases, you’ll also need a copy of the will and Grant of Probate.
Ask your solicitor or executor for a copy of this; it shouldn’t be hard to get your hands on it.
2. Show the inheritance funds in your bank account
Once you’ve proved that the money is rightly yours, you’ll then need to show the funds in your bank account.
(Or in a statement that has the name of the executor or trustee from the deceased estate)
If the inheritance isn’t in your name, then you’ll need a letter to outline that legally you can access the funds.
All amounts must be identical to what is in the executor’s letter.
Now depending on who you are lending with, the timeframe of how long the funds need to be in your account will vary.
Which we will get into now…
How much can I borrow?
You’ll be able to qualify for a home loan if you have at least 5% of the property value available, which can come from the inheritance.
Anything lower and you’ll be at risk of getting your loan declined.
Now provided you can show your 5% deposit there is another challenge some banks will present: genuine savings.
Read More: How much Deposit do I need to buy a home?
What are genuine savings?
Genuine savings are there to show lenders you have a bit of hurt money in the property, most lenders like to see 5% of the property purchase price saved in a bank account for 3 months but there are a few exceptions to this rule.
In other words, some lenders will want to see you hold the inheritance in your account for 3 months before being able to buy a home.
The good news:
Only some lenders want to see the money in your account for 3 months.
A few ways around include:
- ✅ If you have more than 10% deposit when buying the home.
- ✅ If you are currently renting, and have at least 6 months clean rental history. This proves you are stable and make regular repayments.
- ✅ If you look at other banks that don’t require genuine savings.
So in short, with specific lenders, you can borrow up to 95% of the property value. The best part?
You’ll be treated the same as a borrower who has saved the deposit themselves. So really, if you have received an inheritance, it will make no difference to the borrowing process. Again, provided that the money is non-refundable.
But you will still need to get Lenders Mortgage Insurance if you are borrowing more than 80% of the loan to value ratio.
And finally, don’t forget that just because you’ve got a sum of money doesn’t mean that the rest of the lending criteria doesn’t apply.
What I mean by this is, you’ll need to have enough income to maintain the loan, good credit history as well as low debt.
So you’ll be treated as a regular home buyer, with no exceptions.
The ultimate benefit of using inheritance as a deposit means that you’ll be able to speed up the process of getting into the property market.
Am I eligible for the First Home Buyers Grant still?
If you’re buying a house with inheritance money, you are still eligible for the First Home Owner’s Grant!
The amount of the grant varies between states, however, it can be up to $15,000.
This extra boost could be enough to help cover the costs of Government fees and solicitor fees.
All the same processes and eligibility requirements still remain the same. For example, in Queensland, the grant is only applicable to new builds, those buying off the plan or for incredibly renovated properties meeting certain criteria.
Will the bank look at me badly because I haven’t saved the money myself?
When buying a property with an inheritance, you are viewed just like any other borrower. The same interest rates and offers are available for you as a buyer.
In short, you will not be penalised or receive any different treatment when buying a property with an inheritance.
Your income and eligibility as a buyer will be reviewed.
So just because you have (potentially) a large sum of money to put down as a deposit, you will still need to have good credit and be eligible to take out the loan you are applying for.
So no, the bank won’t look at you badly because you haven’t saved the money yourself.
Read More: How Much can I borrow from the banks?
Debt and other payments
Now that you have all the information for buying a property with inheritance money, it’s time to consider other debts.
It can be easy to dream about supercharging what you’ve got right now and go ahead and look at buying a new property.
But, if you have pre-existing debt, the question is, should you pay it off first?
With that, here’s how to plan out payments and debt to determine which one should be paid off first, and where your money should go.
Should I buy a house or pay off personal debt with the inheritance?
This one is going to come down to your personal situation, but lets look at a quick example.
Kate has received an inheritance of $40,000 from her grandmother who has passed away.
She has a car loan of $10,000 which costs $1,000 per month.
Should Kate pay out the personal loan, or leave it open?
If your personal loan, or other debts are going to reduce your borrowing capacity then it could make sense to pay them out.
In Kate’s case, her personal loan reduced her borrowing capacity by $172,000 so she decided to pay it out.
Want to see what is best for your situation, get in touch with our mortgage brokers.
Read More: Book a free assessment
More Resources for First Home Buyers
- First Home Buyers Guide from start to finish
- How to Buy a House 🏘 (Step-By-Step Case Study)
- Using your Superannuation to build your deposit: The Complete Guide to the First Home Super Saver Scheme
- How to save for a house deposit (fast)
- Build a House in Brisbane 🏗 The Definitive Guide
Ready to take the next step toward buying? We’re happy to help. Schedule a call today with a Home Loan Expert from Hunter Galloway, the home of home buyers.
The information on this page is general in nature and should not be considered as advice. Before you act on this information you must seek independent legal and financial advice.