FHA Refinancing to Buy Out Another Homeowner
But did you know you can also refinance a home to buy out another title holder or pay off a land contract?
FHA loan rules in HUD 4000.1 specify the acceptable uses for an FHA refinance loan. Those uses basically include refinancing a primary residence for the purposes mentioned above. You cannot refinance an investment property with an FHA mortgage.
FHA refi loans are for owner/occupiers who are refinancing principal residences or properties that will become principal residences. The non-residential use of any property to be refinanced with an FHA Single-Family Home Loan must not be undermined by the non-residential use.
Refinancing to Buy Out Title-Holder Equity in a Residence
FHA home loans permit the refinancing of a mortgage for the purposes of buying out another title holder. Sometimes two or more borrowers go in on a mortgage together, but one person eventually wants to leave or purchase a home of their own.
In such cases, FHA loan rules in HUD 4000.1 state, “When the purpose of the new Mortgage is to refinance an existing Mortgage to buy out an existing title-holder’s equity, the specified equity to be paid is considered property-related indebtedness and eligible to be included in the new mortgage calculation.”
In these transactions, a primary motivation for the refinance and buy-out is sometimes a divorce. In cases where there is a legal or court-ordered motivation to buy out another title holder, HUD 4000.1 says the lender will be required to “obtain the divorce decree, settlement agreement, or other legally enforceable equity agreement to document the equity awarded to the title-holder.”
Be prepared to furnish any such documentation at application time. If the paperwork is still pending, ask your loan officer what the best way to proceed might be since lender requirements will be an important part of this equation.
Refinancing to Pay Off Recorded Land Contracts
FHA loan rules state that when an FHA refi loan is needed to pay off a recorded land contract, FHA loan rules tell the lender, “the unpaid principal balance will be deemed to be the outstanding balance on the recorded land contract.”
If you aren’t sure how these FHA loan rules may affect your transaction, ask your loan officer to explain further. Lender standards, state law, and other requirements may vary depending on your state.
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