The Quick Read: A new, larger mortgage replaces your old first mortgage. The closing agent then sends part of the new loan’s proceeds straight to your partner, and you may never touch that money. The partner’s lien or claim is released once the payoff clears. Because that payoff did not buy the home, the loan is generally treated as a cash-out refinance, even if you walk away with no cash.
What to Know Before You Read On
- A “money partner” is a third party with a claim on your home’s value, such as a home equity investor or a co-owner.
- The payoff amount comes from your contract with the partner, not from the lender.
- The new loan must fit under a loan-to-value cap, so your equity sets the ceiling.
- Rate-and-term refinances generally can’t pay off this kind of claim. Cash-out loans can.
- Government streamlines, the FHA Streamline and the VA IRRRL, don’t fit this job.
What Is a “Money Partner,” Exactly?
“Money partner” is a plain-English label, not an agency term. It means someone other than your first-mortgage lender who has put money into your home or holds a claim on it. Two types come up most.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
The first is a home equity investor. This company gives you a lump sum today. In exchange, you repay a larger lump sum later, based partly on what the home is worth at that point. These are often called home equity contracts or shared-appreciation agreements. They usually carry no monthly payment, which is the appeal.
The second is a co-owner. Maybe a sibling, ex-spouse, or relative holds title with you. You want to own the home alone, so you need money to buy out their share.
Both cases share one mechanic: the new mortgage must be large enough to cover the old first loan, the partner’s payoff, and the closing costs. Lenders and underwriters don’t use the phrase “money partner” in their guidelines. They look at what kind of debt or claim is being paid off, and that decides the loan type.
Where a Payoff Fits Among Refinance Types
A payoff to a partner fits the cash-out lane, not the rate-and-term lane. Rate-and-term, also called limited cash-out, is built to swap one loan for another with only small cash back. Paying off a claim that never financed the home pushes the file into cash-out.
Lendmire’s cash-out refinance programs page lays out how brokers arrange these loans through wholesale lenders. The short version for this situation is the leverage cap. On a one-unit principal residence, a conventional cash-out generally tops out at 80% loan-to-value. Two- to four-unit principal residences and second homes generally stop at 75%. Occupancy sets the leverage, and the figures stay subject to lender guidelines and full file review.
Texas has its own rule. A cash-out on a Texas homestead is capped at 80% of the home’s value by the state constitution.
How the Loan Is Underwritten, Step by Step
Here is the sequence on a typical file, start to finish.
1. Read the partner contract first. The payoff formula lives there. Look for what triggers settlement, whether the partner must consent to a refinance, and how the home’s value gets set. Some contracts restrict refinancing or demand payment when you refinance.
2. Request a written payoff statement. The title or escrow company needs a dated figure from the partner. It should include a daily amount, because the number moves if closing slips. The lender can’t compute it for you.
3. Choose the loan type. The file is classified as cash-out because the partner’s claim didn’t fund the purchase. For an equity investor, that is an inference from how the agencies treat non-purchase liens. It isn’t a line in a rulebook that names these contracts.
4. Apply and document. The lender verifies income, assets and credit. The wholesale conventional programs start at a 620 decision score. The automated finding governs most files, with a total debt-to-income ceiling of 50%. Manually underwritten loans run tighter, at 36% or 45%.
5. Order the appraisal. Value drives everything. It sets the maximum loan, and it may also set the partner’s share if the contract keys to appraised value.
6. Check seasoning. The first mortgage being paid off generally must be at least 12 months old, counted from note date to note date. A borrower also generally needs six months on title. Delayed financing, inheritance and legal-award exceptions exist.
7. Title work and the payoff order. Title confirms the partner’s recorded lien and what must be released.
8. Closing. The old first mortgage and the partner are paid from loan proceeds, and any remainder goes to you.
Five things decide the outcome: appraised value, the contract’s payoff formula, equity left after the old mortgage and costs, your income and credit, and whether the seasoning test is met.
What the Agencies Say About Paying Off a Lien
Conventional loans follow rules set by Fannie Mae and Freddie Mac, the two agencies that buy most of them. Both draw the same line.
In a limited cash-out refinance, Fannie Mae allows only subordinate liens that were used to purchase the property to be paid off and rolled into the new loan. Fannie Mae’s Selling Guide, section B2-1.3-02, says a loan becomes cash-out if proceeds pay off a subordinate lien that did not fund the purchase. The lender must also document that the old lien funded part of the price. Exceptions exist for energy-related debt.
Freddie Mac says the same in Guide section 4301.4. A junior lien can be paid off in a no-cash-out refinance only if it was used in its entirety to acquire the property, and the file must prove it. That section also sets the cash-back allowance for these loans: the greater of 1% of the new loan amount or $2,000. Fannie Mae’s version is the lesser of 2% of the new loan amount or $2,000.
Cash-out lanes work the other way. They can pay off junior liens and can also put equity in your hands for any purpose.
Where the Money Goes at the Table
The numbers on a closing statement follow one formula. The new loan equals the old first mortgage, plus the partner’s payoff, plus closing costs, plus any cash to you. That total has to fit under the cap.
Here is a modeled example, in percentages of the appraised value only. Say the old first mortgage equals 50% of value and the partner’s payoff equals 22%. Together that is 72%. Under an 80% cap, 8% of value remains for closing costs and any cash back. The file fits.
Now change one input. Say the partner’s payoff equals 35% instead. The total hits 85% before costs, which is over the cap. Something has to give.
Your options in that spot:
- Bring your own cash to the table to cover the gap.
- Negotiate a partial payoff, if the contract allows one.
- Keep the partner in place with their written agreement to sit behind the new loan.
- Wait for the home’s value or your balance to improve.
A low appraisal creates the same problem. If value comes in under expectations, the 80% cap shrinks with it, and the payoff may no longer fit. Check how your contract treats a disputed value before you order.
The mortgage-insurance rule rarely matters on cash-out loans because the standard cap sits at 80%. Mortgage insurance is required above 80% LTV on the agency path, with one exception: the wholesale no-MI cash-out lane. That lane reaches 89.99% LTV with a 680 score and a 50% ratio. It is limited to a thirty-year fixed on a primary residence with a conforming balance, and it carries its own six-month seasoning. It isn’t written in Texas. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
When Your Partner Is a Co-Owner
A buyout is a different animal from an equity-contract payoff. The co-owner holds title, or an agreement gives them a share. The new loan pays them for that share, and they sign over their interest.
Buying out a co-owner under a written agreement is a limited cash-out transaction at both Fannie Mae and Freddie Mac. Freddie Mac’s cash-out refinance page also describes a “special purpose” cash-out option for buying out a co-owner’s equity, so the wording you see on your file may differ from one lender to the next. Ask which label applies before you commit.
The same page notes a spacing test. When a first lien is paid off, at least 12 months must pass between the old note date and the new one.
A buyout needs a written agreement stating the price. It also needs a deed that removes the co-owner from title. If the co-owner is also on the old mortgage, the payoff of that loan removes them from the debt.
Where the Rule Breaks: Named Edge Cases
General rules have exceptions, and a few matter here.
Purchase-money second liens. If your partner’s money funded the purchase, and the whole lien did, a rate-and-term loan may still pay it off. The lender has to document that. This is the “purchase-money” exception in the agency rules above.
Shared-equity and subsidy programs. Affordable-housing programs that take a share of appreciation under resale restrictions follow their own rules. Don’t assume a commercial equity contract works the same way.
VA loans. The VA IRRRL is a streamline for replacing an existing VA loan. VA Pamphlet 26-7, Chapter 6 says it must replace the existing VA loan as the first lien and cannot refinance other liens. A VA cash-out refinance can pay off any type of lien, and the borrower can also receive cash.
FHA loans. The FHA Streamline pays only the existing FHA loan and costs, with no appraisal and limited credit review. An investor payoff needs an FHA cash-out, which requires owner occupancy.
Occupancy in general. A cash-out can be written on a primary residence, a second home or an investment property, and occupancy sets the leverage. For the purposes of this article, the home you live in is the target.
Contracts with refinance restrictions. Consumer advocates, including the National Consumer Law Center, report that some equity contracts restrict second liens, renting, or refinancing, or require payment upon refinance. Read yours for these clauses.
| Situation | Loan path | Can it pay the partner? |
|---|---|---|
| Existing VA loan, want to pay partner | VA cash-out | Yes, any lien |
| Existing VA loan, rate swap only | VA IRRRL | No, VA loan only |
| Existing FHA loan, want to pay partner | FHA cash-out | Yes, owner-occupied |
| Existing FHA loan, rate swap only | FHA Streamline | No, FHA loan and costs |
| Conventional, non-purchase lien | Cash-out refinance | Yes |
| Conventional, purchase-money lien | Rate-and-term | Yes, if documented |
Above the conforming loan limit, jumbo programs take over. They start at a 660 decision score, reach 90% leverage on some lanes, and carry loans up to $5,000,000, with a 50% ratio ceiling on the fixed lanes. Which ones allow cash-out depends on the lender.
What Changes in Your Budget
Paying off an equity contract swaps one obligation for another. The contract’s cost usually arrives as a deferred lump sum. The mortgage turns that lump sum into a bigger balance with monthly principal and interest.
Two other changes matter. A cash-out replaces your entire first mortgage. If your old loan had terms you liked, you give those up on the whole balance. Closing costs also apply on the full new loan, and they come out of the same equity room as the payoff.
For an equity contract, the CFPB’s home equity contracts spotlight describes these as an upfront cash payment in exchange for a future lump sum tied partly to home value. It notes they are often marketed as alternatives to cash-out refinances and HELOCs, and tend to cost more than other home-secured financing. It also says some long-term contracts can roll into a new contract only if enough equity remains. When a settlement date nears, a refinance may be one way out.
Mistakes That Derail These Files
- Assuming “not debt” means “not a lien.” Equity contracts are often marketed as investments, but they are secured by a recorded lien and carry a repayment obligation. The lien shows up in title.
- Expecting a rate-and-term loan to work. The agency rules above push these files into cash-out.
- Using a stale payoff number. A payoff letter has an expiration. If closing slides, the figure changes.
- Ignoring the appraisal’s role. The same value can lift your cap and raise the partner’s share.
- Leaving the partner’s release for later. The lien release or deed transfer should be arranged before the table, not after.
- Believing the lender sets the payoff. The contract does. It can run higher than expected if the home appreciated.
- Thinking regulators have banned these contracts. The CFPB has issued warnings and taken legal positions. That is not the same as a ban.
Before You Apply: A Short Checklist
- Get the partner contract and read the settlement and refinance clauses.
- Request a written payoff statement with a daily amount.
- Estimate your value and your first-mortgage balance, then see whether the total fits under the cap for your occupancy.
- Confirm that the first mortgage meets the 12-month note-date test and that you meet the six-month title test.
- Pull your credit and compare your score to the program floors above.
- If a co-owner is involved, get the written buyout agreement in place.
Weighing It Against Keeping Your Loan
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.
Key Terms Defined
Cash-out refinance: A new mortgage larger than the one it replaces, so part of the proceeds can pay other debts or go to you.
Limited cash-out (rate-and-term) refinance: A refinance that replaces your loan with only small cash back and limited lien payoffs.
Purchase-money lien: A loan used entirely to buy the home.
Home equity contract: An agreement where a company gives you cash now, and you repay a lump sum later based partly on your home’s value.
Payoff statement: A written, dated figure from your partner stating what they must be paid to release their claim.
Loan-to-value (LTV): The loan amount divided by the home’s appraised value, shown as a percentage.
Seasoning: The waiting period a lender wants between events, such as owning the home or taking out the loan you plan to pay off.
Subordination: A written agreement where a lien holder accepts a position behind the new first mortgage.
Frequently Asked Questions
Will I get any cash at closing?
Maybe, maybe not. A cash-out file can have zero cash to you, because the loan type is set by what gets paid off, not by whether you receive money. Any cash back must also fit under the leverage cap after the old mortgage, the partner and the costs.
Can the partner stay on my home instead of being paid off?
Yes, in some cases. The partner’s lien must then sit clearly behind the new first mortgage, which requires their written subordination. That isn’t a payoff, and it depends on whether their contract allows it.
Does a VA or FHA streamline pay off an equity investor?
No. The VA IRRRL replaces only the existing VA loan, and the FHA Streamline pays only the existing FHA loan and costs. You would need a VA or FHA cash-out refinance, subject to program guidelines.
What if the appraisal comes in low?
A lower value shrinks the maximum loan, because the cap applies to appraised value. The payoff may no longer fit. Your options are bringing cash, negotiating a partial payoff, or waiting. Check whether your partner’s contract lets you dispute the value.
Is a cash-out refinance the same as a home equity loan?
No. A cash-out replaces your first mortgage with one new loan. A home equity loan or line sits behind your first mortgage as a separate debt. When a payoff must be recorded cleanly, many borrowers prefer one new first lien. Any approval remains subject to lender guidelines and full file review.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Fannie Mae Selling Guide B2-1.3-02: Limited Cash-Out Refinance Transactions
2. Freddie Mac Guide Section 4301.4
3. Freddie Mac: Cash-Out Refinance
4. VA Pamphlet 26-7, Chapter 6
5. CFPB Issue Spotlight: Home Equity Contracts Market Overview
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How a Cash-Out Refinance Disbursement Works After Closing · Can You Get Approved for a Cash-Out Refinance That Rolls Closing Costs Into the Loan? · How a Lender Counts Paid-Off Cards in Cash-Out Refinance DTI
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.