Can you use your inheritance as a home loan deposit?

By Mark Rosanes

Receiving an inheritance is often a bittersweet experience. While losing a loved one is among the most painful life events one can go through, the gift these people leave behind in the form of an inheritance can serve as a blessing.

During such an emotional period, thinking about how to best use inheritance money can be overwhelming, so it is best to take all the time you need before arriving at a decision.

How does the inheritance process work?

When a person dies, their assets – or what is legally coined as estate – are often left to their loved ones in the form of a will. The will is a legal document outlining a person’s wishes after they die, which can include who will inherit their estate, how the estate will be distributed, and if there are restrictions on how the inheritance can be used. An executor is often appointed to carry out the will.

In the absence of a will, however, the state or territory government will dictate how the estate is managed, including how it is distributed among family members. In instances where the executor is unwilling to perform their legal responsibilities, the court can appoint an administrator to carry out the will. The deceased’s debts and taxes may also be paid out before the estate is distributed.

The whole inheritance process can take months, but the good news is once the inheritance money is transferred to your account, you can use it for whatever purpose you choose. 

Can you get a home loan using inheritance money?

You have plenty of options when it comes to spending your inheritance – and this includes using the money as a deposit for your dream home.

However, banks and other financial institutions often have strict requirements for those opting to use inheritance money to open a home loan. These are the things you need to prove:

1. The inheritance is non-refundable

First, you need to prove that the money is rightfully yours. To do this, you need to provide a letter from the executor validating the details of the inheritance, including the amount and when it was given to you. You may also be asked to provide a copy of the will and grant probate, proving that the will is valid and registered. Your solicitor can help you secure this document.

2. The inheritance money has been transferred to your bank account

You will also need to provide bank statements showing that your inheritance has been deposited in your account. If your inheritance is held in the name of the executor or trustee of the deceased’s estate, you should provide a letter stating that you can legally access the funds. The amount and date specified in the bank statement should match those in the executor’s letter. 

3. You have been in possession of the inheritance of at least three months

Some lenders will require you to hold the inheritance in your account for at least three months before you can be eligible to apply for a home loan.

How much can you borrow?

Just like traditional loan applicants, you can borrow up to 95% the property’s value, but you may be required to pay for lenders mortgage insurance. To avoid paying this cost, you must shell out at least a 20% deposit.

Some lenders allow borrowers who have received a huge monetary gift or inheritance to use the amount as a deposit. There are also lenders, however, that only accept a deposit made up of genuine savings, meaning you must have built the savings yourself.

Additionally, you can use your inheritance money on top of other government-sponsored benefits, including the First Home Owners Grant (FHOG) and the First Home Loan Deposit Scheme (FHLDS).

But regardless of the source of your deposit, you also still need to meet other standard home loan requirements, including job security, stable income, minimal debt, and a good credit history.

If you want to get an idea on how much you can afford to borrow based on your income and expenditure, our borrowing power calculator can help provide an accurate estimate.

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