How to use the untapped equity in probate realty to obtain funds to expedite
the close of probate
What financing options are available for Executors and Administrators?
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.
So, what can you do with mortgage financing? Here are just a few examples:
- Pay attorney fees
- Arrange a buy-out by other heirs
- Resolve adversarial “work-outs”
- Close probate sooner than selling
- Provide quick funds for emergencies
- Pay Medi-Cal and other creditors
- Stop foreclosure
- Pay delinquent taxes
- Money for repairs
- Pay settlements and fund other legal actions
- Get “Junior” and his family out of the house (also called a “get out” loan)
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
§10514) - 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
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
equity).
It’s important to note that borrowers are not required to 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.
Loans to executors and administrator may take as few as 10-15 working days
to close if you have full court powers and there are no objections to your borrowing.
With limited powers, factor in the added time to obtain court authority via
a Court Order. This may take from as few as several days to several months to
accomplish.
Either way, putting equity to work in this way is much more time and cost effective
than selling.