How to Use Financing in Friendly and Adversarial Estate Matters
How to use the untapped equity in realty to reallocate estate and trust
assets and expedite the close of probate
By Rick Harmon
This special report covers the following:
- What can you do with mortgage financing?
- What financing options are available?
- What does the attorney need to do to obtain financing?
Its no surprise that probate related mortgage financing is fast becoming the
preferred alternative to selling. Once a rarely used method for providing liquidity,
borrowers have embraced financing despite the fact that it’s not available through
the big banks and mainstream home lenders.
Everybody wants to go to heaven;
but nobody wants to die
Faced with the very real prospect of being forced to sell their family home
to a stranger, Heirs often prefer to find a way to keep estate realty. Typically,
one or more siblings want to keep estate property while others only want their
money. In other cases, there is insufficient liquidity in the estate to pay
creditor claims and the cost of administration without selling what is the major
asset: estate realty. Consequently, borrowing is a quicker, less expensive and
more attractive solution compared to selling estate realty.
Attorneys, too, are seizing upon mortgage financing. Experience has proved
that it’s much easier to close an estate when all interested parties get what
they want. It hardly seems that it was almost ten years ago I started preaching
this method to the probate legal community. Clearly, the financing concept has
taken root and become an acceptable practice.
A bridge over troubled waters
So, what can you do with mortgage financing? Here are just a few examples:
1. Pay attorney fees
2. Arrange a buy-out by other heirs
3. Resolve adversarial “work-outs”
4. Close probate sooner than selling
5. Provide quick funds for emergencies
6. Pay Medi-Cal and other creditors
7. Stop foreclosure
8. Pay delinquent taxes
9. Money for repairs
10. Pay settlements and fund other legal actions
11. Get “Junior” and his family out of the house (also called a “get out” loan)
What financing options are available for fiduciaries and individuals?
What is the maximum loan amount a borrower can obtain? What rate and terms can
a borrower expect? What are lenders really looking for when qualifying borrowers?
In order to gain an accurate perspective, we’ll evaluate the borrowing options
available to each entity in the mortgage market. Conventional mortgages offer
the most favorable rates and terms. Lenders that do the heavy priced-based advertising
are offering these type loans. Borrowers must qualify based on a myriad of market-driven
lending guidelines relating to risk, income, savings and property condition,
just to name a few.
It’s important to note that not all borrowers sign personally.
Probate Code §9805 states that the personal representative executing a
debt instrument shall not be personally liable. Accordingly, non-natural person
borrowers, usually fiduciaries in these cases are by definition non-conforming
borrowers. This is important to a borrower because, since the lender has no
recourse beyond the security (real estate) for such a loan, traditional mortgage
sources such as Fannie Mae and other lending channel will not buy these loans.
These borrowers only fit the non-conventional equity lender guidelines. Let’s
begin by reviewing typical lending guidelines for non-natural person borrowers:
Executors and Administrators can obtain equity-based mortgages
for up to 50-65% of the property value, per lender’s appraiser. This depends
on the type and quality of the property and the complexity of the file. Interest
rate premiums for first mortgages are typically 2.5-4% above the equivalent
30 year fixed rate for a conventional loan for a fully qualified, “A”
paper borrower. Mortgage terms available are usually shorter than for conventional
loans: 10-15 years on average. Shorter terms are not uncommon.
Lenders will require that the subject property be in insurable condition, since
the mortgage is primarily qualified by the soundness of the security (the property’s
Conservators, Guardians, Trustees & other Fiduciaries will
generally find terms available for these non-natural person borrowers about
the same as for executors and administrators. Similarly, lenders will use the
protective equity remaining in the property to be used as security as the major
driving force in approving these loans. Another factor, which may influence
a lender’s decision to lend, is whether or not the borrower is a professional
fiduciary. Also, the presence of a major adversarial situation or even litigation
may dissuade a would-be lender from granting a loan.
The lenders who offer these loans are almost as few in numbers as lenders who
offer executor and administrator loans. We have seen, on occasion, one or two
banks fund a fiduciary loan, however their official underwriting guidelines
seem to prohibit making loans for which no individuals have obligated themselves.
Successor trustees may likewise find a conventional loan if borrow qualifies
and signs personally, but we see all too many times that these lenders, too,
at the last moment require property to be deeded into a natural person borrower’s
name which is what estate borrowers don’t want to do.
Loans to individuals (signing personally)
When purchasing or distributing estate or trust realty, borrows may obtain up
to 80% of property value, and sometimes more. In the mortgage industry, lenders
offset lending to higher risk borrower by reducing the maximum loan size on
a given property and charge rate and fee premiums as the market and situation
dictates. This market-driven approach to financing does translate into the greatest
number of options for individual borrowers.
Borrowers must qualify based on credit risk score, income, and meet program
guidelines. Strong borrowers will have a better chance of obtaining a loan,
of course. Sub-prime borrowers (with less-than-perfect credit, low or hard-to-prove
income, or little or no savings) may still qualify for attractive financing
at competitive rates. “Ken and Barbie” type borrowers, in fact, represent
only a fraction of the clients referred to us. However, just getting borrowers
qualified is only part of the challenge for most banks and mortgage lenders.
Trust and estate buy-out and work out transactions are well beyond the expertise
of the most seasoned loan officer/processor/underwriter teams. The biggest difficulty
is in getting conventional mortgage lenders to fully understand and appreciate
the circumstances for which the borrower wishes to buy out other heirs by using
their future distributive share to offset the amount of funds required (similar
to a non-cash down payment). Most all lenders want to see cash deposited into
escrow, i.e., a down payment. Consequently, don’t expect your financing plans
to be completed smoothly (or at all) unless the attorney and lender can work
Lenders will scrutinize an incredible number of aspects of most conforming
loan transactions, not all of which are directly related to the borrower. For
instance, the property must currently be in insurable condition. Properties
with deferred maintenance and/or defects usually require correcting prior to
In a market as competitive as the mortgage industry there is little or no room
for gaps in interest rates available to borrowers. Advertised interest rates
are only available for “conforming” loans. Higher interest rates available
for higher risk (“sub-prime”) borrowers. This must be balanced with
the observation that many lenders advertise rates that don’t reflect what’s
available in the real world for anyone but our “Ken and Barbie” example.
Still, the surprising fact is that, in a great many instances, attractive financing
options do exist for borrowers, in spite of their own limited income and other
Heirs know how to add, but not subtract
Yes, this seems all too often true. However, our experience suggests that many
misunderstandings (read that adversarial actions) result from a mistrust of
assertive heirs by others, a lack of understanding of the probate process, and
unrealistic financial expectations resulting from a sale to a third party.
What must the attorney need to do to obtain financing for client?
The primary actions that the attorney must be concerned with are as follows:
1. Discuss general options with client
2. Contact lender regarding file particulars (we suggest you choose the lender)
3. Obtain a written buy out agreement from affected parties (if appropriate)
4. Request written financing plan from lender
5. Complete specific noticing or court actions, as necessary
Attorney actions that are specific to Executor & Administrator loans:
- Full IAEA Power requires a Notice of Proposed Action to appropriate parties
- Limited/Special Powers requires Court Order to Borrow (PC §9800 or
Actions specific to Conservator & Guardian loans:
- Requires Court Order to Borrow (or Sell) in all cases
Actions specific to loans to Trustees & Trust Fiduciaries:
- Review trust for “Power to Encumber.” Power to borrow not sufficient
- If no Power, requires Court Order to Borrow
- If Power present, need Death Cert. and/or Trust Transfer documents
- If Successor Trustee, need copy of entire Trust Agreement & recent Trustee’s
Certification of Trust Status (to obtain title insurance)
Actions specific to loans to borrowers signing individually (personally)
- Title must vest in name(s) as individual(s)
- Transfer may take place prior to or during escrow
- Transfer via Deed, Assignment, Preliminary or Final Order for Distribution,
or as agreed upon with transfer agent in advance
- Agree on plan for distribution on loan proceeds
- Always consult with lender prior to taking transfer actions
Special Notes for attorneys and conclusions
For Estates and Trusts in foreclosure:
- Contact secured creditors immediately, document with letter
- Obtain preliminary title report & review with client
- Have a back-up plan (borrow vs. sell)
- If property reverts to lender, submit demand for costs of administration
For loans to non-natural persons
- Gain flexibility by Petitioning/Noticing for more funds than needed
- Use flexible language (i.e, “approximate interest rate”) if possible
- Provide lender courtesy copy of drafts for their review prior to filing
- Advise lender if increased bond required or likely to be required
- Distribute estate realty to heirs subject to new mortgage
For borrower(s) signing personally
- Advise lender status of estate or trust up front to avoid confusion
- Get written buy-out or work-out agreements early to avoid delays
- Request lender have title insurer check for liens on distributee/borrower
Frequently Asked Questions:
Q: What if the client doesn’t have reasonable expectations of
A: Review with client the timeline and costs associated with a buy out
plan versus selling to a third party. Use the “Heir-Splitter” worksheet
to illustrate the different options.
Q: What if a lender’s borrower pre-qualification letter doesn’t
specify the vesting?
A: Don’t be surprised if, at the last minute, the lender requires the
property to be transferred and vested in the name of the borrower personally.
Demand a written statement that clarifies this matter if the loan is to be made
to an estate or trust.
Q: Can my client still get a loan if we don’t have a written buy out
A: Written agreements may prevent delays due to misunderstanding by parties.
Q: What if available financing falls short of giving all parties cash?
A: An alternative to distributing cash could be a promissory note or
other non-cash asset. Poor condition of subject property may restrict loan limits
to third parties buyers, too.
Q: I’m not sure how to best structure this transaction. Any suggestions?
A: Yes, help is available. If your lender is experienced with estate
and trust buy-outs, they will have sample petitions and other forms, or provide
this service at additional cost.
For all probate attorneys:
1. Consider financing even if just a “back up” plan
2. Get a friend at a title insurance company and give them all the business