When you get a mortgage, you typically have the option to apply with a co-signer. A co-signer with strong credit and finances can help you qualify for a loan you otherwise wouldn’t be able to get. They also can help you secure better terms on the mortgage.
However, there may come a time when you want to remove a co-signer from your mortgage. For example, your co-signer may be a parent with good financial standing. Refinancing is one way to remove a co-signer.
If you’re looking to remove a co-signer from your mortgage by refinancing, here’s what you need to know.
Key Takeaways:
- The steps to remove a co-signer by refinancing start with talking to a lawyer or real estate agent, and end with you filing a quitclaim deed.
- Some alternative ways to remove a co-signer include petitioning the lender and qualifying for a co-signer release.
- There are factors to consider before removing a co-signer from your mortgage, such as an increased debt-to-income ratio and a greater risk of missing monthly payments.
What Is a Co-Signer on a Mortgage?
A co-signer on your mortgage is another party who agrees to make your monthly payments if you miss any. They also will take full responsibility for repaying the loan if you stop making payments entirely.
If you apply for a loan with limited or poor credit, you may have the option to add a co-signer to help you qualify for more-favorable terms, such as a lower interest rate. Lenders offer better terms because a co-signer gives it more assurance that the loan will be repaid.
If you’re in danger of missing payments, your credit score — and your co-signer’s — will remain unharmed if your co-signer steps in and pays. If both of you miss payments, your scores can drop.
Co-signer vs. co-borrower
A co-signer and a co-borrower are similar, but there’s an important difference. While both co-signers and co-borrowers are responsible for the mortgage and can strengthen your loan application, co-signers have no ownership interest in the property. They essentially get all the risk, but none of the reward.
Co-borrowers are usually a spouse, family member, or friend who will live in the home with you and have the same legal rights to the property as you do. A borrower’s financial information and a co-borrower’s financial information are judged equally in a loan application.
“Co-signers essentially act as a guarantor for the loan and provide additional security for the lender,” says Velody Foye-Byrd, founder of Eagle Home Partners, a real estate investment firm in Clayton, North Carolina. “On the other hand, a co-borrower is someone who shares equal responsibility with the primary borrower for repaying the loan.”
Because co-signers have no ownership interest in the property, you can refinance or sell the home without their approval. If you have a co-borrower, you must make decisions about the mortgage and home jointly.
4 Steps to Refinancing To Remove a Co-Signer
Removing a co-signer can be a way to relinquish any financial obligation they have to repay your loan. It’s important to consider the pros and cons of refinancing to get rid of a co-signer before doing it. If you decide that this is the right choice, here are four steps to remove a co-signer with a mortgage refinance.
1. Talk to a real estate professional
A real estate expert can help you understand the terms of your mortgage, your options, and any issues that could prevent you from refinancing. For example, a real estate lawyer can review your closing disclosure to ensure that the person you’re trying to remove from your mortgage is a co-signer and not a co-borrower. A broker can connect you with mortgage lenders that offer refinance loans with more-favorable terms.
2. Improve your credit and finances
Borrowers typically use co-signers when their credit score and finances aren’t strong enough to qualify for a loan or a lower interest rate without one. If you want to refinance to remove a co-signer, you’ll need to have sufficient credit and to be in good financial standing to handle the mortgage on your own.
You may need to find ways to boost your credit score, lower your debt-to-income ratio, and otherwise prove to lenders that you can afford to pay the mortgage.
3. Explore refinance options
Once your finances are solid enough to qualify for a refinance on your own, it’s time to start comparing refinance options. In addition to removing a co-signer, refinancing gives you the opportunity to adjust other details of your loan, such as its repayment term and interest rate. You also can switch from a fixed interest rate to an adjustable interest rate, or vice versa.
Compare options from multiple lenders before choosing one that best aligns with your needs.
4. Refinance your mortgage and remove the co-signer
Once you find a lender and a loan you like, you can proceed with refinancing and removing your co-signer. Submit the application and wait for the lender to complete underwriting, the refinance appraisal, and the rest of the approval process. When it’s time to close, you’ll sign the paperwork that gives you sole responsibility for repaying your new mortgage.
Alternative Ways To Remove a Co-Signer
If you have good terms on your mortgage, you might not want to refinance and risk losing those benefits.
“Refinancing is certainly the most common way to remove a co-signer from a loan, but it’s not the only way,” says Martin Orefice, CEO of Rent To Own Labs, a real estate platform based in Orlando, Florida. “Some mortgages come with what is known as a co-signer release clause that may allow the co-signer to get off of the mortgage if certain conditions are met, usually in the form of a certain percentage of the loan being paid in full. It’s also always useful to start by simply asking your lender if you can remove the co-signer without refinancing.”
Here are some options to remove a co-signer if you don’t want to refinance.
Petition the lender
One of the simplest options is to ask the lender to remove your co-signer. However, the lender could refuse to do it. After all, having a co-signer on your mortgage benefits the lender by offering additional assurance that the loan will be paid back.
If the lender is willing to remove your loan’s co-signer, be prepared to prove that you can handle the loan on your own.
Co-signer release
Some lenders have specific provisions for borrowers to qualify for the removal of a co-signer. For example, a lender may allow you to apply for a co-signer release after a specific number of timely payments. Check the fine print of your mortgage to see if there are ways to get a co-signer release.
Loan modification
Loan modification involves working with your lender to change the details of your existing mortgage. It can take many forms, such as extending the term of your loan, reducing its balance, adjusting the interest rate, or changing the monthly payment.
You can ask your lender if it can modify your loan to remove the co-signer and make other changes that will help you handle the loan on your own. For example, if you have a high DTI ratio, modifying your mortgage to extend your loan term and lower your monthly payment could help you qualify for the loan without a co-signer.
Keep in mind that lenders aren’t obligated to modify your loan, and it’s usually only an option if you’re facing financial trouble. However, some lenders may allow loan modification to remove a co-signer if you give them a significant reason, such as a divorce.
Pay off the mortgage
While it’s easier said than done, paying off your mortgage is a guaranteed way to remove a co-signer. If you don’t have a mortgage anymore, that means you don’t have a co-signer. Given the cost, this isn’t an option for everyone.
Factors To Consider Before Refinancing To Remove a Co-Signer
Removing a co-signer from your mortgage means they won’t be responsible for your loan. You may want to remove a co-signer if you and the co-signer cut ties, or they no longer want their credit to be potentially impacted.
However, getting rid of a co-signer may mean additional consequences for you, so it’s important to understand how this could affect you and make sure you’re prepared.
Your DTI ratio could increase
Your DTI ratio compares your minimum monthly debt payments to your gross monthly income. The higher your debt payments and the lower your income, the higher your DTI ratio will be. A lower DTI ratio is best.
When you have a co-signer on a mortgage, their income and debt payments are also included in your DTI ratio calculation. Removing the co-signer could increase your DTI ratio, which can make it harder to qualify for the best interest rates.
Greater risk of foreclosure
When you remove a co-signer from your mortgage, you’re taking full responsibility for paying off the loan. You won’t have someone there to back you up and take over payments if you can’t afford the monthly bill.
If you encounter unexpected expenses, you could wind up missing monthly payments and getting hit with financial penalties. In a worst-case scenario, this could trigger the foreclosure process.
You could refinance to a mortgage with less favorable terms
One reason you might have used a co-signer is that their strong credit and finances helped you secure a mortgage with a lower interest rate and better terms. Without a co-signer, lenders may be hesitant to offer you the same terms on a refinance, unless your finances have improved.
What If a Co-Signer Can’t Be Removed From Your Mortgage?
If you can’t remove your co-signer from your mortgage through refinancing or other options, a last resort could be to sell your home. Selling your home is an extreme measure — but if you don’t own the home, you don’t need a mortgage. This means you won’t need a co-signer.
Selling your home is also a good way to get your equity out of the home and restart by downsizing to a smaller home that’s more affordable.
FAQ: Refinancing To Remove a Co-Signer
Here are answers to some frequently asked questions about refinancing to remove a co-signer.
You can remove a co-borrower from a mortgage using many of the same methods to remove a co-signer. This includes refinancing, paying off your mortgage, or selling the home. However, since co-borrowers have an ownership interest in the home, lenders may have additional rules to keep in mind.
This largely depends on your definition of easy. Generally, if your finances have improved since you took out your original loan, refinancing to remove your co-signer won’t be too difficult. If you still can’t qualify for the loan on your own, removing the co-signer will be much more difficult.
Adding a co-signer with strong credit and in good financial standing can help you qualify for a mortgage with more-favorable terms and interest rates. With a lower rate, you may have an easier time making monthly mortgage payments, which can strengthen your own credit over time.
The Bottom Line on Refinancing To Remove a Co-Signer
If you have a co-signer on your mortgage, refinancing is one way to remove them from the loan. However, keep in mind that you’ll need to qualify for the new loan based on your own credit and finances. Once your co-signer is removed, you’ll assume full responsibility for making mortgage payments and repaying your loan.
