The Quick Read: It depends on which agency’s rules the loan follows and how long you both held title. Fannie Mae usually treats a qualifying buyout as a limited cash-out refinance, the lower-risk tier. Freddie Mac treats it as a cash-out refinance, but a named “special purpose” kind with its own rules. Either way, the cash goes to the departing owner, not into your pocket.
Why does the label matter?
The label sets your leverage, your mortgage insurance, and your pricing tier. Leverage is the share of the home’s value you can borrow against. Limited cash-out reaches higher leverage than full cash-out, and the gap can decide whether a buyout works at all.
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: 7.40% as of October 15, 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.
Here is the plain version. On a one-unit primary residence, a conventional cash-out refinance tops out at 80% of the home’s value. On two- to four-unit primary residences, second homes, and investment property, the cap is 75%. A limited cash-out refinance, which Lendmire’s wholesale lenders usually call a rate-and-term refinance, goes to 95% on a one-unit primary home. It can reach 97% in narrow cases where the existing loan is agency-owned and the first-time-buyer program allows it.
Lendmire arranges conventional loans through wholesale lenders, and this question comes up often. It also gets answered wrong often, because the two agencies do not use the same label. You can read about the full range of cash-out refinance programs Lendmire works with, but the buyout rules below are specific to this situation.
Here is how each agency handles a buyout.
Fannie Mae. Under its Selling Guide, one owner buying out another’s interest is a limited cash-out refinance. This covers settlements from a divorce or the end of a domestic partnership. The property must have been jointly owned for at least 12 months before the new loan disburses. The same page lists buying out a co-owner under an agreement as an acceptable use of limited cash-out proceeds.
Freddie Mac. Its Guide section 4301.6 defines a “special purpose cash-out refinance” as a cash-out refinance where the owner uses the proceeds to buy out a co-owner’s equity. It is still a cash-out loan. It must meet all the cash-out requirements except where that section changes them. The borrower and the co-owner being paid must have jointly owned the home for at least 12 months before the application, and an inherited interest is exempt from that test. Freddie Mac also wants evidence that both owners lived there as a primary residence. Proceeds may pay off the first mortgage, pay off junior liens, and cover related closing costs, in addition to the buyout. Leverage follows cash-out-style limits, not limited cash-out limits, so ask your loan officer for the figure that applies to your file.
Third-party pages sometimes say both agencies treat divorce buyouts as simple rate-and-term refinances. Trust the guides.
| Label | Fannie Mae: limited cash-out | Freddie Mac: special purpose cash-out |
|---|---|---|
| Joint ownership | 12 months before disbursement | 12 months before application |
| Inherited interest | Title exceptions allowed | Exempt from the 12 months |
| Occupancy test | Primary home for top leverage | Both owners lived there |
| Leverage tier | Limited cash-out | Cash-out-style limits |
Who are you actually paying?
Three roles get mixed up in these conversations. The person on the deed, the person on the note, and the person owed money are not always the same. Each role is treated differently.
| Role | On the deed | On the note | What ends the claim |
|---|---|---|---|
| Co-borrower | Usually | Yes | Refinance or release |
| Co-owner on title | Yes | Not always | Deed transfer plus payout |
| Note-only borrower | No | Yes | Refinance or assumption |
Here is the mechanic that trips people up. A deed moves ownership. Only a refinance, payoff, or approved assumption moves the debt. A quitclaim deed can take someone off title while leaving them fully liable on the loan.
Fannie Mae requires at least one borrower on the new loan to be on title at application. It allows documented exceptions, such as property inherited or awarded in a divorce, separation, or domestic-partnership dissolution. So the lender still wants a clear ownership trail, even when the names on the deed and the note differ.
How does the refinance actually work?
One new loan replaces the old joint loan. The title company pays off the old mortgage and sends the agreed buyout amount to the departing owner. The new note carries only the remaining owner’s name.
The steps run in this order:
1. Confirm title and obligation. Check who is on the deed and who is on the note.
2. Confirm the ownership history. Both agencies look for 12 months of joint ownership, with exceptions for inheritance and some legal awards.
3. Sign a written agreement. A divorce decree, a settlement, or a signed buyout agreement states the terms and the payout. Fannie Mae’s wording is “pursuant to an agreement,” so get it in writing.
4. Order the appraisal. The appraised value sets your leverage. A new appraisal is part of the cash-out process.
5. Qualify alone. Your income, credit, and debt ratios carry the new loan without the other person.
6. Close. Funds flow through the title company.
The ordinary cash-out rule asks that the first mortgage be at least 12 months old. Freddie Mac’s special purpose loans are an exception and follow the ownership rule instead.
If a second lien is part of the payoff, Lendmire’s piece on paying off a HELOC in a refinance explains how that changes the classification.
What changes if you also take cash out?
Taking extra cash can push the loan into full cash-out. A buyout-only loan and a buyout-plus-cash loan can land in different tiers. Fannie Mae caps the cash back at closing at a small share of the loan. Freddie Mac’s special purpose definition limits proceeds to the listed uses.
Whether buyout money counts toward Fannie Mae’s cap is a question for your underwriter. Do not assume either way.
Across the wholesale programs Lendmire places files with, the pattern is consistent. Loans built around one clean purpose, such as paying off the old loan and the partner, get cleaner treatment. Loans that bundle in a kitchen budget or card payoff invite full cash-out review. If you want extra funds, ask for both structures to be priced and compared before you commit.
| Factor | Buyout only | Buyout plus extra cash | Standard cash-out |
|---|---|---|---|
| Likely class | Limited or special purpose | Often full cash-out | Cash-out |
| One-unit home leverage | Up to 95% (Fannie Mae path) | 80% | 80% |
| Mortgage insurance | Above 80% leverage | Above 80% leverage | Above 80% leverage |
| Seasoning | Joint ownership test | Ownership plus loan age | First loan 12 months, title 6 months |
| Pricing direction | Lower tier | Higher tier | Higher tier |
Mortgage insurance, in plain terms, is a monthly cost the lender requires when you borrow above 80% of the value. You can request cancellation at 80% of the original value with good payment history and no second liens. The servicer must end it automatically at 78%. Premiums vary by file, so use a range rather than a promise. Published typical annual premiums run from 0.58% to 1.86% of the balance.
A worked example in units, not dollars
Run the numbers on a home appraised at 100 units. These are modeled assumptions, not market data.
- Existing mortgage balance: 60 units.
- Equity: 40 units, split evenly between two owners.
- Departing owner’s share: 20 units.
- Closing costs rolled into the new loan: assume 2 units.
- New loan: 60 + 20 + 2 = 82 units, or 82% of value.
Now check the ceiling. At 82%, this loan sits above the 80% cash-out cap for a one-unit primary home. Under Fannie Mae’s limited cash-out path, 82% fits within the 95% cap. Under a cash-out-style cap, it falls short. The same buyout can work or fail depending on the classification. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Mortgage insurance would apply at 82%, because the loan is above 80% of value. The remaining owner also has to carry the full payment alone. If the numbers fall short, you have a few options:
- Renegotiate the split.
- Bring cash to closing.
- Use other assets to settle part of the buyout.
- Sell the home.
What documents and eligibility checks apply?
Plan on a written agreement, proof of the joint-ownership period, an appraisal, and a loan application showing you can carry the new loan alone. Your lender decides the final document list.
- Written agreement or decree. It states the payout and who keeps the home.
- Ownership history. Both agencies look at the 12-month joint-ownership period.
- Occupancy. Fannie Mae’s top leverage tier needs a one-unit principal residence. Second homes and investment property carry lower caps.
- Appraisal. The value decides how much of the buyout the loan can cover.
- Your qualifying profile. Wholesale conventional programs start at a 620 decision score. The automated finding governs most files, with a total ratio ceiling of 50%. Lender guidelines and a full file review decide the outcome.
If the 97% tier is involved, extra conditions apply. It requires a fixed-rate loan, a one-unit principal residence, automated underwriting, and agency ownership of the existing mortgage. See the Eligibility Matrix for the leverage tiers by occupancy and property type. Manufactured homes carry a lower cash-out cap.
What about special situations?
Divorce is the common case, but it is not the only one. The same rules apply to siblings, unmarried partners, parents and adult children, and inherited homes.
- Under 12 months, or only one owner on title. The limited cash-out buyout path may not be available as written, and the loan can fall to full cash-out rules. Fannie Mae’s title exceptions help with the title-at-application test, but the 12-month buyout test is separate. Ask your underwriter early.
- Texas. Texas home-equity loans follow their own state rules and may not qualify for the special purpose path. A loan officer can confirm how that applies.
- Assumption instead of refinance. The spouse keeping the home can keep paying or request an assumption with release. Only certain loan types are assumable, and an assumption does not automatically release the other borrower. See Fannie Mae’s guidance on changing ownership.
- FHA, VA, and USDA loans. Different rules apply. Talk to a loan officer rather than assuming the conventional rules carry over.
- Taxes. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Does a decree or quitclaim remove someone from the mortgage?
No. A decree divides responsibility between the two people. It does not change the lender’s contract. A quitclaim deed moves title and leaves the note untouched.
The original borrower generally gets released only through a refinance, a payoff, or an assumption with release. The Consumer Financial Protection Bureau reports that to be released, the remaining homeowner generally needs to assume liability after meeting the lender’s underwriting standards. The same research found that some servicers refuse to release the original borrower even after years of payments by the successor.
That is why a refinance is the cleanest way to end shared liability. It is also why the departing owner has a strong reason to want the new loan closed and the old one paid.
Key Terms Defined
Co-borrower: A person who signs the mortgage note and shares responsibility for repaying it.
Co-owner on title: A person named on the deed who owns part of the home, whether or not they signed the loan.
Limited cash-out refinance: A refinance that pays off the existing loan and closing costs, with only small cash back to the borrower. Lenders often call it rate-and-term.
Special purpose cash-out refinance: Freddie Mac’s name for a cash-out loan whose proceeds buy out a co-owner’s equity.
Seasoning: The waiting period a lender wants, such as how long you held title or how old the current loan is.
Automated underwriting: Software that reviews your file against agency rules and returns a finding.
What should you do next?
Start with the written agreement and the ownership dates. Those two facts tell you most of what you need. Then ask your loan officer to price the buyout as limited cash-out and as full cash-out, so you see the leverage gap on your own file.
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. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend. Call 828-256-2183 or request a quote through the site.
Frequently Asked Questions
Can my co-borrower just sign off the loan?
Not by signing a release alone. The lender approves a release only if the remaining borrower qualifies alone, and some servicers decline. A refinance is the more dependable route, because it pays off the old joint loan entirely.
Does the departing person stay liable until the payoff?
Yes. Until the old loan is paid off or released, the original borrower remains responsible to the lender. A divorce decree or deed change does not alter that. The payoff at closing ends it.
Do I need an appraisal?
Expect one. The appraised value sets your leverage and how much of the buyout the new loan can cover.
What if we owned the home for less than 12 months?
The Fannie Mae limited cash-out buyout path may not apply as written, and the loan could be treated as full cash-out. Inherited interests and some legal awards have exceptions. Ask your underwriter which test applies to your dates.
Will the buyout cost more than a standard rate-and-term refinance?
Often, if it lands in a cash-out tier. The size varies by file, so ask for both classifications to be compared on your Loan Estimate.
For your own numbers, request a scenario review with Lendmire.
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.
For the program’s current guidelines, see conventional loan programs.
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References
1. Fannie Mae Selling Guide B2-1.3-02, Limited Cash-Out Refinance Transactions
2. Freddie Mac Guide Section 4301.6, Special Purpose Cash-Out Refinance Mortgages
3. Fannie Mae Eligibility Matrix
4. Fannie Mae, Changing or Transferring Ownership of Your Home
5. Consumer Financial Protection Bureau, Homeowners Face Problems After Divorce or Death of a Loved One
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 to Pull Cash Out of a Home With a Conventional Cash-Out Refinance · Can You Do a Conventional Cash-Out Refinance Right After Buying? · Conventional Cash-Out Refinance Equity Data for a First-Time Borrower
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.