What Is a Mortgage Buyout?


A mortgage buyout can take several forms, depending on the circumstances of the borrower. A lender seeking to foreclose on a delinquent borrower may field offers for a foreclosure buyout to avoid a costly legal proceeding. A divorcing couple may also seek a mortgage buyout to cleanly divide property bought over the life of a marriage. Each circumstance requires approval either from a court or from the mortgage lender.

Buyout in Foreclosure Definition

A mortgage buyout is a refinancing option for a homeowner entering into foreclosure. Refinancing the loan effectively pays off the delinquent portion of the debt and creates a new mortgage. This new loan typically has a much higher interest rate than the previous loan because the borrower is a higher risk due to the mortgage delinquency. A borrower must be proactive in seeking a mortgage buyout. A lender may not be receptive to the process if the borrower waits until the court sets a date for a foreclosure hearing on the property.

Homeowner Equity Requirements

A borrower must have at least 25 percent equity in the property for a lender to approve a foreclosure buyout, according to Business Dictionary.com. This equity is mandatory because it shows the borrower has a previous history of making timely payments on the mortgage and isn't simply looking to get out of a large financial commitment. If a homeowner has made enough mortgage payments to control 25 percent of the property's equity, then the lender has seen some financial return on the initial investment.

Mortgage Buyout in Divorce

A mortgage buyout also occurs in divorce cases where both spouses share an interest in the property. One spouse buys the other spouse's interest in the property through a court-approved settlement to gain sole control of the mortgage and the property in question. A spouse -- if financially able -- may also lobby to pay off the entire mortgage balance to gain 100 percent ownership of the property and sole control of the equity. To perform either function, the court must request a buyout amount from the couple's mortgage lender.

Buyout for Inherited Property

In the case of inherited property, a sibling or relative looking to gain sole ownership of a piece of real property must buy out every other owner by paying an amount equal to the owner's percentage of equity. For example, a person owning 10 percent of a property valued at $100,000 must receive $10,000 in an inheritance buyout. Any owner bought out in this manner loses all interest in the property and the ability to access a proportional percentage of the property's equity.

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