What Is a Mortgage Buyout?

A mortgage buyout is a mortgage refinance option that allows you to use the equity in your home to buy out a co-owner under special circumstances. Also called a cash-out refinance mortgage, this mortgage program is usually available for divorced or separated spouses and other co-owners of real property, where one owner intends to relinquish his ownership interest in the property.

TL;DR (Too Long; Didn't Read)

A mortgage buyout is a type of mortgage refinance that allows a borrower to use her equity to buy out a co-borrower.

Mortgage Buyout Using Cash-Out Refinance

A cash-out refinance mortgage can be used for a variety of reasons, such as for debt consolidation, interest rate reduction, home improvements and paying off subordinate liens. However, if you plan to use the funds to buy out another co-owner’s interest in the property, the lender may set different qualifications for these special purpose refinances, such as specific property eligibility and residence requirements. Typically, one- to four-unit primary residences, second homes and investment properties qualify for cash-out refinances. However, each lender establishes the property type requirements.

Your eligibility for refinancing will also be based upon the value of your home as well as the remaining outstanding balance on the initial mortgage, and many lenders require both owners to have jointly owned the property for at least 12 months before the start of the application process. However, joint owners of property who inherited their co-ownership interest in the property might be exempt from the 12-month consecutive ownership requirement.

Written Documentation Required

Most lenders will require that you submit written documentation demonstrating your length of residency and the length of joint ownership between both you and your spouse. An appraisal of the home must be completed to determine the property value of the home and the amount of equity in the property.

Underwriting Guidelines for Mortgage Buyout

You must begin an application for a mortgage that will be similar to the application process for your initial mortgage. During the underwriting process, the lender will determine your creditworthiness by verifying your income and mortgage payment history.

Proceeds of Mortgage Buyout

The closing costs and financing cost of the refinance mortgage will be rolled into the amount of the new loan. The co-owner who receives the mortgage buyout proceeds will acquire an amount that is limited to his equity interest in the property. The proceeds may also be used to pay the balance of your original mortgage and any junior liens against the property. Under the mortgage buyout program, you will not receive the proceeds from the loan if you continue to maintain your ownership in the property.

the nest