How an FHA Cash-Out Treats a Partner Buyout or Relative Repayment

The Quick Read: It can work when the person being paid out is on title and a signed, legally enforceable agreement fixes the amount owed. FHA treats that buyout equity as part of the new loan, but it sits inside the same 80% loan-to-value ceiling as any other cash-out. Repaying a relative who is not on title is a different question, and no specific rule settles it; the occupancy test applies to the borrower who keeps the home, not to the relative being paid out.

What Is Being Bought Out, Exactly?

Two situations get lumped together here, and they are not treated alike.

The first is a title-holder buyout. Two people own the home, one wants to keep it, and the refinance pays the other person their share of the equity. This is the divorce case, but it also covers unmarried partners, siblings, and other co-owners.

The second is a relative repayment. A parent lent money for the down payment, or a sibling funded a renovation, but neither is on title. The money is owed, but no ownership share is being purchased.

HUD’s lender handbook, Handbook 4000.1, addresses the first case directly. When a refinance buys out an existing title-holder’s equity, that specified equity counts as property-related debt and can be included in the new mortgage amount. The lender must document the amount with a divorce decree, settlement agreement, or other legally enforceable equity agreement. That last phrase matters. It is not limited to divorce.

The second case is murkier. Across the wholesale programs Lendmire places files with, a family loan to someone who is not on title is generally a file-by-file underwriting question, not a settled rule. Ask the loan officer up front how the file would be classified.

How Does FHA Define Cash-Out?

A cash-out refinance is a refinance with proceeds not limited to specific purposes. A no-cash-out refinance limits proceeds to paying off the existing debt and transaction costs.

A buyout lands in a gray zone. The buyout language sits in the refinance section next to the no-cash-out purposes, yet FHA also limits excessive cash back. Whether a given buyout is processed as cash-out or no-cash-out depends on how the lender reads the file and how much money, if any, reaches the borrower beyond the payoff and the buyout. HUD has no single page that settles it, so expect the answer to vary by lender and by file.

The practical point: classification drives the leverage ceiling and the documentation. Before you order anything, the loan officer can tell you which lane your file falls into.

The 80% Ceiling Is Where Buyouts Get Squeezed

Standard FHA cash-out reaches 80% of the home’s value, on a home you have owned and lived in for the 12 months before the case number is assigned. HUD set that cap in Mortgagee Letter 2019-11, applying it to both loan-to-value and combined loan-to-value, measured against adjusted value. HUD’s announcement of the change describes it as a reduction from the earlier 85% cap. Anything you read that still quotes 85% is out of date.

Here is why that matters for a buyout. The buyout is property-related debt, so it counts inside the cap. It does not get extra room.

The new loan has to cover three things together:

• The payoff of the existing mortgage
• The documented buyout equity
• Any financed closing costs

All of that must fit under 80% of the appraised value. Credit score does not raise the cap. A stronger score does not buy extra leverage.

Thin equity is where a buyout runs into the cap. If the home has little equity beyond the existing loan, a large buyout simply does not fit. The math works best where the existing loan is modest relative to value and the departing owner’s share is a manageable slice of what’s left.

How the Loan Is Underwritten, Step by Step

1. Confirm the product fits. FHA cash-out is for a principal residence you own and occupy. Second homes and rentals are not eligible for this product.

2. Gather the buyout paperwork. You need the decree, settlement, or signed equity agreement fixing the amount owed. A verbal family understanding is not enough.

3. Order the appraisal. The adjusted value sets both the 80% ceiling and how much equity exists to divide.

4. Build the loan amount. Existing payoff, plus documented buyout equity, plus financed costs, all under the cap. FHA’s upfront mortgage insurance premium of 1.75% of the base loan can be financed, and an annual premium applies based on term, amount, and LTV.

5. Underwrite the keeper alone. Credit, income, and debt ratios are judged on the person staying in the home. The departing owner’s income no longer counts. The base ratio pair is 31/43 housing and total, and documented compensating factors can reach 40/50 at the top tier. The automated finding governs most files, subject to lender guidelines.

6. Close and record. The old loan is paid off, which removes both original borrowers from it. The departing owner signs a deed, which is a separate document from the loan.

7. Ask how the file was classified. It affects documentation and how much cash back is allowed.

A Relative Can Help, but Not With Income

This catches families off guard. Income from a non-occupant co-borrower cannot be used to qualify for an FHA cash-out. A parent cannot sign on to rescue a debt-to-income ratio that is too tight. (A non-occupant co-borrower is allowed on FHA purchases, so a family member who helped you buy may assume the same flexibility exists here. It does not.)

If the keeper cannot qualify alone, the options are narrower: reduce the buyout, renegotiate the timing, or look at a different path entirely.

Where the General Rule Breaks

Streamline cannot pay anyone out. The FHA Streamline refinances an existing FHA loan with no appraisal and a limited credit review, plus a net tangible benefit test. It can sometimes remove a borrower after divorce, legal separation, or death, typically when the remaining borrower has been making the payments. But it is no-cash-out. It cannot fund a payment to a departing partner.

Assumption keeps the old loan. An FHA loan can sometimes be assumed, with the original borrower released through HUD’s approval-and-release process. That can work when the old loan terms are worth keeping. It does not produce cash to pay the person leaving, so it only solves the liability problem, not the buyout.

Inherited homes and sibling buyouts. An heir who rents out the home after inheriting it generally needs to occupy it for 12 months before a cash-out. An heir who moved in right away may avoid the wait. A sibling who does not live in the home cannot meet the occupancy test at all. The Handbook points to special treatment for inheritance and for buying out an ex-spouse’s equity, so confirm the exact wording with the loan officer.

Unmarried partners. Nothing in the rule requires a marriage. A written, signed agreement between co-owners fixing the equity share is the likely route. Have a real estate attorney draft it, not a template.

Reverse mortgages are separate. Heirs who want to keep a home carrying a reverse mortgage follow different payoff rules.

Quick Comparison

A Worked Scenario

Say you and a former partner co-own a home, and you have lived there for years. The existing loan is about 55% of the appraised value. You and your partner agree in writing that their share of the equity is worth roughly 15% of the value.

Stack those up: 55% plus 15% plus costs lands in the low-to-mid 70s. That fits under 80%, with some margin. Now change one thing. If the existing loan is 70% of value, the same 15% buyout pushes you to 85% before costs. That breaks the cap. The fix is a smaller buyout, a staged payout, or a different structure.

This is an illustration, not a quote. Your appraisal, payoff, and agreement set the real numbers, and eligibility is subject to lender guidelines and full file review.

Key Terms Defined

Buyout equity: The documented dollar share of the home’s equity owed to a departing title-holder.

Property-related debt: Debt tied to the home that FHA allows in the new loan amount, including that buyout equity.

Adjusted value: The appraised value as FHA adjusts it, which sets the 80% ceiling.

Non-occupant co-borrower: A signer who does not live in the home; their income cannot support a cash-out qualification.

Release of liability: The lender’s formal removal of someone from the note. A decree alone does not do this.

The Liability Trap

A divorce decree decides who is responsible between the two people. It does not release anyone from the lender’s note. The CFPB’s issue spotlight describes homeowners who ran into delays and resistance when trying to remove a name after divorce or death. It also notes that homeowners do not generally need to refinance to remove a name, if the person keeping the home can assume liability and meet the investor’s assumption criteria.

A quitclaim deed has the same limit: it changes title, not who owes the loan. Until the old loan is paid off, assumed with a release, or the home is sold, the departing partner can remain liable. A refinance that pays off the old loan is the cleanest way to end that.

What the Decision Looks Like in Practice

Walk through four questions before you commit:

• Is the person being paid on title, with a written agreement fixing the amount?
• Does the total (payoff, buyout, costs) fit under 80% of appraised value?
• Can you qualify alone, with no help from a non-occupant relative’s income?
• Do you actually need cash, or only a release from the old loan?

If the answers are yes, yes, yes, and yes, an FHA cash-out is a workable lane. If the equity is thin, consider a smaller or staged buyout. If you only need someone’s name off the loan and the old terms are good, ask about assumption or a streamline first.

If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. All program details are subject to lender guidelines, and nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

For current guidelines and terms, see Lendmire’s FHA loan programs page.

About Lendmire

As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Handbook 4000.1

2. HUD Mortgagee Letter 2019-11

3. HUD press release PR 19-114

4. CFPB Issue Spotlight: problems after divorce or death