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Mortgage to buyout relatives that I own home with

My mother willed her house to me and my relatives. Can I get a mortgage to buyout their ownership stake in the house?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

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 buyout your siblings’ ownership interests in the property. There are several points to keep in mind about a mortgage used to buy someone’s ownership stake in a property you also own.

First, if the mortgage is used to buyout both of your relatives’ ownership stakes in the property 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 you only purchase one of your sibling’s ownership interest and your other sibling remains on the property title and is on the mortgage, then his or her income, credit and employment information are also included when the two of you apply for the mortgage.

Although using two people’s income may help you afford a higher mortgage amount, the lender uses the lower credit score between the two applicants to determine your ability to qualify for the loan and to set your loan terms, including your mortgage rate. The lower your 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 your relatives’s score.

The second point to consider is that your ownership interest can be used as the down payment or homeowners equity to qualify for the mortgage. Depending on if you intend to occupy or rent out the property and the mortgage program, lenders typically permit a maximum loan-to-value (LTV) ratio of 75% to 80% for a loan used to buyout someone else’s ownership stake in a property. This means you are required to make a down payment, or hold homeowners equity, of 20% to 25%.

As evidenced by the example below, if you already hold a stake in the property, then your ownership interest can be used to meet this requirement. In this example, three relatives own equal one-third interests in the 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 buyout the other two siblings’ ownership stakes. Relative 1 uses her or his ownership stake in the property as equity and the 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 she or he now owns 100% of the property. As long as Relative 1 can qualify for the mortgage as a sole borrower, she or he 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%

Please note that if there is an existing mortgage on a property that you inherited, you are required to continue to make the monthly payment or in some cases you may be required to payoff the entire outstanding loan balance. Many mortgages contain an acceleration clause that requires the mortgage to be repaid in full when the property ownership is transferred.  The acceleration clause may be triggered when  property is inherited.

Instead of paying off the mortgage in full with their own funds, many people who inherit properties decide to refinance the mortgage. In this case you are required to repay the existing mortgage on the property before you use any loan proceeds to buyout another owner’s stake.

There are several other points to highlight about a mortgage used buyout someone’s ownership interests. First, anytime you take out proceeds with a mortgage on a home that you own, it is considered a cash out refinance, even if you do not receive any of the proceeds. Returning to the example above, the mortgage used to buyout the other two relatives is classified as a cash out refinance even though the borrower received no proceeds from the loan.

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 no cash is taken out, 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 mortgage rate increases your monthly loan payment and reduces the loan amount you can afford.

The table below outlines mortgage refinance rates and fees for leading lenders. We recommend that you contact multiple lenders to find the best refinance terms. Shopping for your refinance is the best way to save money on your mortgage.

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Current Refinance Mortgage Rates as of October 17, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

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 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.

Review our FHA Cash Out Refinance Guide

If you want to rent out the property you inherited, 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-to-twelve months after you take ownership of a property before you can refinance the mortgage. This requirement may 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 payment or leased the property you may need to wait or occupy the property for a year before you can qualify for refinance.

Finally, your other financing alternatives to buyout 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 can 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.

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Current Home Equity Loan Rates as of October 17, 2019
View All Lenders

%

Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click for more information on rates and product details.

Sources

Conventional Cash Out Refinance: https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

FHA Cash Out Refinance: https://www.hud.gov/sites/documents/40001HSGH.PDF

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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