An inheritance is an acceptable source of funds for a down payment on a home. You do not need to wait until after you receive the money before you apply for a mortgage, although you do need to wait until you receive the funds before your loan closes. For example, you can apply for the mortgage and submit all of the necessary documents and then close the mortgage after the inheritance funds are available to you.
The only reason to wait to apply for the mortgage is if you have a low credit score and you want to use part of your inheritance proceeds to pay off or down your debts to increase your score. Having a higher credit score may enable you to qualify for better loan terms, including a lower mortgage rate, afford a higher loan amount or become eligible for certain loan programs. Realizing an improvement in your credit score may take several months but it may be worth the wait in this situation.
If you credit score is already high enough but you want to reduce your debt balance to improve your debt-to-income ratio, then your best approach is to pay off your debts after you receive the inheritance and then apply for the mortgage. In this case, reducing your monthly debt payments should enable you to qualify for a higher mortgage amount and you do not need to wait multiple months before you submit your loan application.
Please be advised that lenders require a lot of documentation and like a paper trail so I recommend that you retain any documents related to the inheritance disbursement including copies of the will, trust, letters or other legal documents addressed to you. This is important if you are using part of the inheritance money for your down payment as lenders want to verify the source of funds, especially if your prior bank account balance was relatively small.
Lenders require two months of bank statements when you apply for a mortgage but as long as the inheritance funds are reflected on your most recent statement and you can provide supporting documentation, you should be good to go when you apply for the loan. In short, lenders want to make sure that the funds used for your down payment come from a legitimate source and are not a loan that you need to repay. Providing legal documents that show when and how much money you inherited should address this issue.
Additionally, if you decide to use the inheritance funds to pay down or off any debts such as credit cards or student, personal or car loans, you should retain copies of your account statements that show the reduced or zero balance. You should also provide the lender proof of any payments you make such as receipts or online statements. This documentation is important because it may take multiple months for your credit report to show revised account balances and you may not want to wait.
Down payment guidelines vary by lender and are particularly strict if you use an inheritance or a gift. We recommend that you contact multiple lenders in the table below to understand their documentation requirements so that you can be prepared to apply for the mortgage after you receive your inheritance funds. Comparing lenders also enables you to find the best loan terms.
"B3-4.2-01, Verification of Deposits and Assets." Selling Guide: Fannie Mae Single Family. Fannie Mae, April 25 2017. Web.