You have two main options for taking ownership of the house from a relative. With the first option, your relative can give you the property as a gift. After you take ownership of the property, you can do a cash out refinance and use the proceeds however you want, including to pay back your relative.
There are a couple of points to keep in mind if you do a cash out refinance. First, the loan-to-value (LTV) ratio for a cash out refinance is lower than for a regular refinance or for a home purchase mortgage.
For a cash out refinance of a single unit property that you live in, the maximum LTV ratio is 80% and for a two-to-four unit property the maximum LTV ratio is 75%. Using a lower LTV ratio limits the proceeds you can take out of the property and therefore how much you pay back your relative. In short, you may not be able to pay your relative full value for the property, at least not by refinancing.
Additionally, the mortgage rate for a cash out refinance is higher than for a standard mortgage when you receive no proceeds from the loan. We recommend that you contact multiple lenders in the table below to find the best refinance terms including the lowest rate and fees.
There are a couple of other factors to consider if your relative gifts you a property. If the property has a mortgage on it, your relative likely needs repay the mortgage prior to giving the property to you.
In most cases when the ownership of a property is transferred to a new person, such as via a gift, the ownership change triggers an acceleration clause in the mortgage that enables the lender to demand the immediate repayment of the outstanding loan balance, in full. In your case that means that your relative may be required to pay off any mortgage balance when he or she gifts you the property.
Another point to understand is that depending on the lender and the mortgage program, you may be required to own the property for six-to-twelve months before you can do a cash out refinance. If you live in the home as your primary residence, you may not be required to wait but it you use the property as a rental you may be required to wait a certain period of time before you apply for the mortgage. You can confirm this point with lenders after you take title to the property.
Finally, receiving the property as a gift may have tax consequences so we advise you to consult a real estate attorney or accountant to understand any potential tax implications. Both you and your relative want to make sure that the gifting and receiving of the property is handled properly on your tax filings.
The second option for taking ownership of the property from your relative is to simply buy the property from her or him. In this scenario you would obtain a mortgage to buy the home and your relative would receive the proceeds from the sale.
Because this mortgage is a home purchase loan, you are eligible for a much higher LTV ratio -- up to 97% -- which means you could qualify for a higher mortgage amount. Plus, the interest rate for a purchase mortgage is usually lower than for a cash out refinance, so you save money on interest expense.
Qualifying for a mortgage is a little tricky when you buy a home from a relative but as long as the sale transaction is negotiated on an arms length basis and you pay a fair market price for the property you should be approved for the loan. The key point is to pay a price that is relatively consistent with the property value according to the appraisal report.
Both the property purchase and the cash out refinance scenarios require you to qualify for a mortgage based on your debt-to-income ratio, credit score, employment history and other factors. If it is challenging for you to qualify for a mortgage based on standard lender guidelines, one variation is to buy the property from your relative and have her or him provide the mortgage to you, which is known as seller financing.
Review How Seller Financing Works
In this case your relative is still required to pay off her or his existing mortgage -- because ownership of the property is transferred to you -- but the mortgage terms offered by your relative may be more favorable to you. In short, it may be easier to qualify and more affordable if your relative offers you a mortgage as compared to applying for a loan with a lender such as a bank.