As long as you hold legal ownership of the home according to the property title and you can qualify for the mortgage based on your financial and credit profile you should be able to get approved for a mortgage to buy out your relative’s ownership interest in the property. There are several points to keep in mind about a mortgage used to purchase another person's stake in a property you own together.
First, if the mortgage is used to buy out all of the other property owners then you are required to qualify for the mortgage based solely on your monthly gross income, debt payments, credit score, employment history and other factors. If there are two or more other owners and you only purchase one of the other owner's stake, then the other owner(s) remains on the property title and mortgage. In this case their income, credit score and employment information are also included when all of the remaining owners apply for the mortgage.
Although using two or more people’s income may help you afford a higher mortgage amount, the lender uses the lower credit score between multiple applicants to determine your ability to qualify for the loan and to set your loan terms, including your mortgage rate. The lower the credit score, the higher your interest rate and monthly payment. This is something to consider if there is a significant gap between your credit score and another borrower's score.
The second point to consider is that your ownership interest can be used used to meet the down payment or homeowners equity requirement for the mortgage, as evidenced by the example below. In this example, three relatives own equal one-third interests in a property. We assume the property is worth $100,000.
Ownership Before Mortgage to Buyout Relatives
Property Value: $100,000
Relative 1 Ownership stake (%) / ($): 33.3% / $33,333
Relative 2 Ownership stake (%) / ($): 33.3% / $33,333
Relative 3 Ownership stake (%) / ($): 33.3% / $33,333
The scenario below shows Relative 1 obtaining a $66,666 mortgage to buy out the other two relatives’ ownership stakes. Relative 1 uses their ownership stake in the property as equity and the loan-to-value (LTV) ratio is 67%, which is below the maximum limit applied by most lenders. After the mortgage closes, the value of Relative 1’s homeowners equity remains $33,333 but they now own 100% of the property. As long as Relative 1 can qualify for the mortgage as a sole applicant, they should be approved for the loan.
Ownership After Mortgage to Buyout Relatives
Property Value: $100,000
Relative 1 Ownership stake (%) / ($): 100% / $33,333
LTV Ratio: 67%
There are several other points to highlight about a mortgage used buyout someone’s ownership interests. First, the mortgage is classified as a cash out refinance unless you personally take out less than $2,000 or 2% of the loan amount in proceeds, whatever is lower.
Review How a Cash Out Refinance Works
The mortgage terms and qualification requirements for a cash out refinance are different than for a refinance when the borrower receives little or no proceeds, which is called a rate and term refinance. The mortgage rate for a cash out refinance is typically .250% to .750% higher than for a regular refinance. A higher rate increases your monthly loan payment and reduces the loan amount you can afford.
Additionally, the maximum LTV ratio for a cash out refinance is lower than for a rate and term refinance. This means you are required to have more equity in the home, but as we outlined above, you can use your ownership stake to meet this qualification guideline.
For example, the maximum LTV ratio for a cash out refinance on a single unit property you live in is 80% and 70% to 75% for a rental property. The maximum LTV ratio for an FHA cash out refinance is also 80% but that program only applies to one-to-four unit owner occupied properties and not investment properties.
The good news is that if you personally receive minimal or no proceeds from the mortgage and most or all of the funds go to purchase another owner's stake in the property, you qualify for a rate and term refinance, which enables you to qualify for better loan terms. In addition to paying a lower mortgage rate, the maximum LTV ratio for a standard rate and term refinance is 97%, which significantly increases the maximum mortgage amount you are eligible for.
We should highlight that to qualify for a rate and term refinance the property must have an existing mortgage. So if the property is owned free and clear -- such as if you inherited a property with no mortgage -- you need a cash out refinance even if you receive minimal proceeds from the loan.
The table below outlines mortgage refinance rates and fees for leading lenders. We recommend that you contact multiple lenders to understand the refinance program that best fits your situation. Shopping for your refinance is also the best way to save money on your mortgage.
Please note that if you want to rent out the property, you need to qualify for an investment property cash out refinance, which charges a higher mortgage rate and applies more challenging qualification requirements.
Additionally, some lenders and loan programs also require you to wait six months after you take ownership of a property before you can refinance the mortgage, which is applicable if you recently bought a property with a relative. This requirement does not apply if you inherited a property as long as you have made the monthly mortgage payment on time and have not rented out the property since you took ownership. If you had a late mortgage payment or leased the property you may need to wait or occupy the property before you refinance.
Finally, your other financing alternatives to buy out someone’s ownership interest in a property are a home equity loan or line of credit (HELOC). These are good options if the property is owned free and clear or if you want to keep the current mortgage in place.
Because a home equity loan is smaller than a refinance, your monthly payment, closing costs and total interest expense may be lower. Plus, with a HELOC, you can draw down the line multiple times and use the proceeds to purchase the ownership interest over time.
The table below shows home equity loan and HELOC rates, fees and loan terms. We recommend that you shop multiple lenders to find the loan that is right for you.
"Understanding Cash-Out Refinances." My Home by Freddie Mac. Freddie Mac, 2019. Web.
"II.A.8.d.v. Cash-Out Refinances." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, January 2 2020. Web.