There are a number of reasons you may find yourself in a position where you need to buy out another owner of a property. The most commonly thought of situation would be as part of a separation or divorce, but you may also be seeking to buy out a sibling from an inherited property or perhaps you had a co-signer on your original mortgage who now wants to be removed from the deed and mortgage. Whatever the reason, our team at Hanscom Federal Credit Union can help you through the process of refinancing to buy out another owner.
First, let’s talk about the name “equity buy-out." The name misleads some people into thinking they have to purchase the house from the other owner. This isn’t true, an equity buy-out is actually handled as a refinance loan, not a purchase loan.
Determine Who Should Buy the Other Out
The reality is, it’s possible that one of the owners may be better able to qualify for a loan than another. If the property was originally purchased jointly using two or more incomes to afford the mortgage, it may potentially be difficult to qualify with just one income. Anyone who hopes to buy out a property will need to qualify for the mortgage according to Fannie Mae’s underwriting guidelines. What does this mean? It means the person buying out the mortgage must be able to verify their income, have enough income to support all their obligations, and have a sufficient credit history – and those with higher credit scores are likely to secure a better interest rate.
If one of you is unable to qualify, or able to qualify only for a significantly higher rate, that could be part of the negotiations. If there is a substantial difference in what you can qualify for, you may choose to divide assets through other means, or to simply sell the home and split the proceeds. The bottom line is that you need accurate information about the type and cost of loans that would be available to either of you before you can agree to a buyout.
What Type of Refinance To Take?
There are two types of refinances that you can choose from. One is a limited cash-out refinance and the other is a cash-out refinance. When one owner buys out the interest of another owner, this is considered a limited cash-out refinance (if the property was jointly owned for at least 12 months). However, you cannot receive any additional cash from the refinance beyond the amount that is paid out to the other owner.
If you need cash above and beyond the agreed-upon buyout, the transaction will be considered a cash-out refinance. Generally speaking, a limited cash-out refinance will have more favorable rate and cost options with access to more equity while a cash-out refinance will typically cost you slightly more and only allows the borrower to access up to 80% of the home’s value.
All parties must sign a written agreement that states the terms of the property transfer and the proposed plan for the proceeds (a/k/a equity taken as cash) from the refinance transaction. This could come in the form of an informal buy-out agreement, or in the case of a divorce, it could be a formal divorce decree or court order outlining how the property is to be handled. Except in the case of recent inheritance of the subject property, documentation must be provided to indicate that the property was jointly owned by all parties for at least 12 months preceding the disbursement date of the new mortgage loan.
How Much The Home Is Worth?
You may choose to hire an appraiser to advise you of the home's value in advance of drafting your buy-out agreement so that you are prepared. However, remember that your lender is going to require their own appraisal, completed by an independent company and that appraisal value is what will determine the amount of equity that can be borrowed. Appraisers go through extensive training to develop the expertise required to assess the value of a home and must get a professional license. Along with visiting your home, a licensed appraiser will compare your house to other houses that have sold recently, looking at factors such as the home’s condition, location, and size, to determine its comparative value.
A Note About Divorce Buy-Outs
Alimony, Child Support, or Separate Maintenance (As Income)
You are not required to use your child support income to qualify for a loan, but if you do want to include the additional income on your application, it must be consistent and stable income, and you must have six months of an on-time payment history for it to be considered. To do so, we must document that alimony, child support, or separate maintenance will continue to be paid for at least three years after the date of the mortgage application, as verified by one of the following:
- A copy of a divorce decree or separation agreement (if the divorce is not final) that indicates the monthly payment and states the amount of the award and the period of time over which it will be received. ***Note: If you are separated and do not have a separation agreement that specifies alimony or child support payments, we will not consider any proposed or voluntary payments as income.
- Any other type of written legal agreement or court decree describing the payment terms.
- Documentation that verifies any applicable state law that mandates alimony, child support, or separate maintenance payments, which must specify the conditions under which the payments must be made.
- If the children are reaching the age of emancipation, and child support payments will not continue for 3 years, the child support income will not be used for qualifying purposes.
- We will be verifying stable and consistent payments of any child support, alimony, or separate maintenance to ensure it has been received for the prior 6 months consistently. This can be verified through copies of the checks or 6 months of bank statements reflecting the deposit.
Alimony, Child Support, or Separate Maintenance Payments (As a Liability)
When you are required to pay alimony, child support, or separate maintenance payments under a divorce decree, separation agreement, or any other written legal agreement and those payments must continue to be made for more than ten months, the payments must be considered as part of the borrower’s recurring monthly debt obligations. However, voluntary payments do not need to be taken into consideration and an exception is allowed for alimony. A copy of the divorce decree, separation agreement, court order, or equivalent documentation confirming the amount of the obligation must be obtained.
This monthly debt obligation will impact your debt-to-income ratio and could impact your ability to qualify for a mortgage. This debt will be included under any circumstance, unless it can be documented that the payments will no longer be required in less than 10 months.
In summary, an equity buy-out can be a stressful situation, but our team at Hanscom FCU can help you through the process and will make it as easy as possible for you. With a combined experience of over 20 years in the mortgage industry and individually over five years assisting our credit union members through the buy-out process, our loan officers Liz Clarke (NMLS #881030) and Scott Barry (NMLS #1210010) have the expertise needed to help you navigate this challenging process.
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