A mortgage buyout is a method by which one co-owner in a property acquires another co-owner's interest in that property. The legal approach you took when you and your co-owner bought the house originally will influence all ownership rights and obligations now. The agreement likely influenced how you financed the home and how you can now, as well as whether your co-owner can sell her interest to you.
Assuming you own property as tenants in common (TIC), that you financed the property with a single mortgage secured by the whole property and that you are buying out the jointly owned property, but the original agreement doesn't cover the buyout, you'll need to muddle through and create a sale agreement.
Request Property Appraisal
A first step in buying out a co-owner is to have an appraiser determine the property's value. If both you and your co-owner want to hire an independent appraiser, it's a good way for you both to have a thorough understanding of the status of the property and confidence in the purchase price. The appraised value will serve as the basis of your purchase offer.
Calculate Your Home's Equity
Subtract your mortgage balance from the appraised value to determine your equity in the house. Next, assuming you and your co-owner have equal shares in the house, divide that equity by two to calculate the 50 percent share in the equity. If either of you made a disproportionate contribution to the purchase or maintenance of the house, adjust the figure accordingly.
Agree to a Buy-Out Price
Given your equity in the home and that of your co-owner, as well as the home's appraised value, negotiate the price you'll pay to acquire the co-owner's interest in the home. Typically, the seller's equity is a starting point in the negotiation, but keep in mind your loan costs, if applicable, and closing costs. Once you agree to a purchase price, contact the mortgage holder to address issues related to the existing mortgage if there is one.
Apply for New Mortgage
If you can't come up with cash and you must refinance to buy-out your co-owner, you'll need to apply for a new mortgage. Begin by obtaining a copy of your credit report from each of the three credit bureaus. Check it for errors and contact the bureau to request corrections of errors if you need to.
Next, apply for a cash-out mortgage refinance. As you did with the original mortgage, you'll complete a loan application and supply your preferred lender with supplemental documents, such as paystubs from your job. Other information that you'll need includes your W-2s, tax returns, bank account records and other financial records that help your lender understand your financial status and your ability to make timely loan payments.
Read More: Do Mortgage Companies Verify Tax Returns with IRS?
Prepare Purchase Agreement
You will save money if you and your co-owner can come to terms on the mortgage buyout. Doing so will avoid legal and court fees.
As the buyer, it might be advisable to have an agent create the purchase agreement document. If your agent is a licensed attorney, she can construct the agreement from scratch. Otherwise, you can use a standard form and the agent can complete it using the information that you provide.
Create Real Estate Purchase Agreement
Like your original real estate purchase agreement, the mortgage buyout agreement is legally binding. In this case, of course, you are the buyer and your co-owner is the seller.
The purchase agreement must state the specifics of the property and the financial arrangement that you and your co-owner have devised. It must contain your offer price; information about the buyer and seller; a description of the property that's being purchased; the price you are paying for the property and how you are financing the purchase; the house fixtures and appliances that will and won't be included in the sale; the residential contract closing date and your possession date; the amount of the deposit you'll pay your co-owner in advance of the closing date; the party who will pay the closing costs and the amount; any conditions that will negate the agreement; and conditions you and your co-owner must meet for the sale to be finalized.
Complete Real Estate Closing Process
Once your loan application is approved and the paperwork is in order, you will work with the lender to close your new loan. As the buyer, you will sign a deed that transfers the seller's interest in the property to you, the bill of sale that describes the property you are purchasing and an affidavit of title that confirms the property's ownership and a transfer of tax declarations. This loan will pay the balance of the original loan and may provide the cash you need to pay your former co-owner for her interest in the home.
As the buyer, it's likely that you will pay from 2 percent to 5 percent of the home sale as closing costs. These costs include attorney fees, credit bureau fees, home inspection fees, a loan origination fee, a survey fee, an escrow deposit and an underwriting fee.
The former co-owner will sign over her interest in the property and you will become the property's sole owner. She does so by signing a certificate of title, a deed of sale, a loan payoff, a statement of closing costs and a statement of information. Depending on your purchase agreement, the seller's fees may include a portion of title insurance premiums, transfer taxes and recording fees, prorate taxes and HOA dues, if applicable, and home warranty premiums.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.