Mortgage Facts - Did You Know

When to use a Special Purpose Cash Out Mortgage?

A special purpose cash-out is a great tool for a divorce buyout as the cash is not counted as “cash-out” so long as it is being used for an equity buyout and subject to a written agreement.

A cash-out refinance Mortgage where the owner of a property uses the proceeds of the refinance transaction to buy out the equity of a co-owner is a special purpose cash-out refinance Mortgage.

A special purpose cash-out refinance Mortgage must meet the applicable requirements, the loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratio requirements for cash-out refinance Mortgages, and the minimum Indicator Score requirements, Mortgages with Risk Class and/or Minimum Indicator Score Requirements.

 

The loan amount of a special purpose cash-out refinance Mortgage is limited to amounts used to buy out the equity of the co-owner, which may include:

 

  • Paying off the first Mortgage, regardless of age
  • Paying off junior liens secured by the Mortgaged Premises
  • Paying related Closing Costs

 

In addition, the following conditions must be met:

  • The Borrower and the co-owner receiving the buy-out proceeds must have jointly owned the property for a minimum of 12 months prior to the initial loan application (parties who inherited an interest in the property are exempt from this requirement)
  • The Borrower and the co-owner receiving the buy-out proceeds must provide evidence that they occupied the subject property as their Primary Residence (parties who inherited an interest in the property are exempt from this requirement)
  • The Borrower and the co-owner receiving the buy-out proceeds must provide a written agreement, signed by all parties, stating the terms of the property transfer and the disposition of the proceeds from the refinancing transaction
  • The Borrower who retains sole ownership of the property may not receive any of the proceeds from the refinance transaction

 

Special documentation requirements

The Seller must retain the following in the Mortgage file:

  • Documentation evidencing that the Borrower and the co-owner jointly occupied the Mortgaged Premises as their Primary Residence, if applicable
  • A copy of the written agreement stating the terms of property transfer and the disposition of the refinance proceeds

 

Freddie Mac Special Purpose Cash Out Refinance Guidelines – Click Here