There are no simple answers to your question but there are several ways to purchase an ownership interest in a property. We walk through the options below and address some of the pros and cons of each approach. There are several factors, such as the current value of the property and the value of the ownership interest that you want to buy, that influence which option makes the most sense for you.
Use a seller note to purchase the ownership interest. With this option, you purchase the ownership interest from the seller directly by paying part of the purchase price up-front and the seller accepts a note for the balance of the purchase price. For example, if the seller’s ownership interest is worth $50,000 (this is only an example), you pay her or him $10,000 up-front and she or he accepts a 10 or 15 year note for the remaining $40,000.
You would pay off this loan by making monthly payments to the seller based on loan terms that the two of you agree upon. In this scenario the seller must be willing to take back the note and may prefer to receive the entire proceeds from selling her or his ownership interest upfront instead of receiving the payment plus interest over several years.
Arrange a second mortgage with a lender to purchase the seller’s interest. With this option, you keep the existing mortgage in place but arrange a second mortgage or home equity loan to purchase the seller’s ownership interest. With this approach, you end up with two monthly payments: one payment for the existing mortgage and a second payment for your new, second mortgage.
Because the other property owner (the one not selling her or his ownership interest to you) would still own the property in this approach, she or he would need to qualify for the second mortgage or home equity loan based on her or his credit score, debt-to-income ratio and other qualification factors. Additionally, there must be sufficient equity in the property to support the combined loan-to-value (CLTV) ratio of both the existing mortgage and the new second mortgage.
The table below shows home equity loan rates and fees. You can use a home equity loan to pay for all or part of the seller’s ownership interest. We recommend that you contact multiple lenders to find the best home equity loan terms.
Obtain a new mortgage with the other property owner to buy the ownership interest. With this option you and the other owner obtain a new mortgage as co-borrowers to replace the existing mortgage on the property and to purchase the seller’s ownership interest. In this scenario, both you and the other owner are required to qualify for the mortgage based on your credit, financial and employment profiles. The upside to this approach is that your co-borrower may be able to use her or his current ownership interest for the down payment required to qualify for the mortgage.
Although you would be getting a mortgage to buy-out someone’s ownership interest in the property, this is technically a cash-out refinance because an existing property owner is a co-borrower on the loan. The table below shows refinance rates and closing costs. We recommend that you shop multiple lenders to find the mortgage that best meets your needs.
Use a personal loan to purchase the ownership interest. With this approach, you take out a personal loan to purchase the seller’s ownership interest. The downside to this scenario is that a personal loan usually charges a higher interest rate than a mortgage or home equity loan, which could make this financing option more expensive.
Obtain a mortgage to buy the property outright and then sell a stake back to the remaining owner. With this option, you apply for a mortgage to purchase 100% of the property from the current owners and then sell a stake back to the individual who wants to retain an ownership interest. In this scenario you apply for the mortgage as a sole borrower and you need a large enough mortgage to purchase the property outright. You also need to come up with sufficient funds to make the down payment required by the lender.
You would use this approach if the property owner who wants to retain her or his ownership interest has poor credit or other circumstances that prevent her or him from qualifying for a mortgage or home equity loan as a co-borrower. Please note that you would be required to qualify for the mortgage based solely on your income, credit score and other factors.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the mortgage you can afford
In closing, there are many ways to purchase an ownership stake in a property, as we outlined above. The right approach depends on the financial goals and capabilities of both the buyer and seller. Working together your should be able to arrange a solution that satisfies all parties.
"Understanding Cash-Out Refinances." My Home by Freddie Mac. Freddie Mac, 2019. Web.« Return to Q&A Home About the author