If you originally needed a cosigner to qualify for your mortgage loan, you may eventually want to remove them, especially if your financial situation has improved. Having a cosigner can be restrictive if they are unable or unwilling to cooperate in decisions about the home. Fortunately, with some strategic planning it is possible to remove a cosigner from a mortgage loan. Here’s what you need to know.
Why Remove a Cosigner?
There are a few key reasons you may want to remove a cosigner from your mortgage loan
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Independence. With a cosigner on your loan, you need their consent for any changes or decisions related to the mortgage. Removing the cosigner gives you full control.
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Protecting their credit. If you miss or are late on payments, it damages both your credit and the cosigner’s. Taking them off the loan insulates their credit.
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Refinancing. You may want to refinance to a lower rate or cash out equity, but your cosigner may not want to participate. Removing them allows you to refinance independently.
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Relationship changes. If your relationship with the cosigner deteriorates, removing them can provide a clean break and prevent future issues.
Refinancing to Remove a Cosigner
The most straightforward way to remove a cosigner from your mortgage is to refinance the loan in your name only. Here are the key steps in this process:
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Review your finances. As the sole borrower, you’ll need to independently qualify for the new mortgage by meeting the lender’s income, credit score, and debt-to-income requirements.
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Improve your credit. Work on boosting your credit score and reducing debt prior to applying for the refinance. This will help you get approved and secure the best terms.
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Compare mortgage rates. Shop different lenders to find the most competitive interest rate and closing costs for your situation. Focus on overall cost, not just rate.
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Submit loan application. You’ll go through the full loan application process on your own, including providing income documentation, bank statements, and completing new appraisal and title work.
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Close on new loan. After approval, you’ll close on the refinance, using the new loan to pay off the old mortgage. The cosigner will be released from the original debt.
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Change title. Finally, record a new deed removing your cosigner from the home’s title. Be sure to get their consent via a quitclaim deed or release form.
This process usually takes 30-45 days from application to closing. Closing costs are typically 2% to 5% of the loan amount. The cosigner does not need to be present at closing.
Alternative Options to Remove a Cosigner
If refinancing is not feasible, here are some other potential options:
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Loan assumption. You take over the mortgage, remaining on the original terms. But the lender must approve, and cosigner consent is required.
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Loan modification. The lender may modify the existing loan to remove the cosigner if you show improved financial strength.
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Cosigner release. Some mortgages include an automatic cosigner release after 1-5 years of on-time payments and meeting credit/income criteria.
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Sell the home. Selling the property and satisfying the mortgage obligation removes both you and the cosigner from the loan.
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Pay off mortgage. If you can pay the loan balance entirely, the debt obligation ends for both parties. But this is rarely plausible for most.
These alternatives are more limited than refinancing – be sure to consult your lender and cosigner first.
Timing the Removal
Ideally, you should remove a cosigner 3-5 years after getting your mortgage. Here’s why:
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Seasoning. Most lenders prefer to see 3+ years of mortgage payments before approving you solo. This demonstrates stability.
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Credit building. A few years gives you time to improve your credit profile by making timely payments, lowering debts, and increasing your credit history.
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Loan balance. Your loan balance declines over the first 5 years due to amortization, making it easier to qualify for a refinance on your own.
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Equity. Home values typically appreciate over the first several years. Higher equity makes refinancing more appealing to lenders.
So while it’s possible to remove a cosigner earlier, doing so after 3-5 years sets you up for success.
Impact on Mortgage Terms
When refinancing to remove your cosigner, expect some differences in your new mortgage:
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Higher rate. Without your cosigner, you likely won’t qualify for the best rates and will pay 0.125% to 0.5% higher versus your joint rate.
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Mortgage insurance. If you have less than 20% equity, your new loan may require private mortgage insurance that adds to your monthly payment.
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Shorter term. To offset higher rates or a higher mortgage insurance premium, you may prefer a shorter 15 or 20 year term to maintain the same monthly payment.
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Lower loan amount. Lenders will assess your repayment ability based only on your income, which may result in a lower approved loan amount compared to what you qualified for jointly.
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Cash-out limits. Your cash-out refinancing capability will be lower without a cosigner. Most lenders limit cash-out amounts to 70-80% loan-to-value for a single applicant.
While the terms won’t be as favorable, removing your cosigner still provides major benefits if you can comfortably handle the new mortgage payments on your own.
How Cosigners Can Adversely Affect Your Mortgage
It’s important to note that having a cosigner on your home loan can also work against you, further underscoring the value of removing them. Here are some potential drawbacks:
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Refinancing roadblocks. Want to refinance but your cosigner is difficult to work with or uncooperative? Their resistance can derail beneficial refinances.
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Home equity access limits. Cosigners reduce how much home equity you can access via cash-out refinancing, home equity loans, or lines of credit.
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Credit damage. Late payments by you will hurt both your credit and your cosigner’s.collections and foreclosures also create credit issues for cosigners.
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Property control complications. Cosigners on your title can obstruct or contest decisions about property maintenance, renovations, selling, or transferring ownership.
For these reasons, it usually makes sense to remove your cosigner when feasible. Just be sure to take the appropriate legal steps to get them off your mortgage, title, and deed.
Tips for Successfully Removing a Cosigner
Follow these tips to ensure the process goes smoothly when removing your cosigner:
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Inform your cosigner upfront and get their consent before initiating any process. No surprises!
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Time it right – wait until you have 3-5 years of solid payment history and home equity.
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Shop mortgage lenders and compare interest rates and closing costs. A lower rate can save thousands over the loan’s term.
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Avoid cash-out refinancing, as full cash-out options will be very limited without a cosigner. Stick to lower-cost rate and term refinancing.
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Be patient – it takes diligence and discipline to boost your credit score and financial profile enough to qualify solo.
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Consult your tax advisor – removing a cosigner via refinancing or sale may have capital gains/losses implications.
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Meet all lender conditions during underwriting – provide ample documentation of income, assets, and credit to get approved.
With proper planning and preparation, the process of removing a cosigner from your mortgage can go off without a hitch. Just be sure to do your homework upfront.
Answers to Common Cosigner Removal Questions
Here are answers to some frequently asked questions on removing a cosigner from a mortgage loan:
Can I automatically remove my cosigner after a certain period?
- Some mortgages include an optional cosigner release after 1-5 years of on-time payments. But it’s not automatic – you still must apply and meet the lender’s credit and income criteria. Many mortgages have no cosigner release provision.
What are the cosigner removal requirements for an FHA loan?
- For FHA loans, you must make 36 consecutive monthly payments on-time to apply for a cosigner release. The remaining borrower also needs a minimum credit score of 620 and total debt ratio below 43%.
Does removing a cosigner require refinancing?
- In most cases, yes. Refinancing is the most straight-forward way to remove a cosigner. Alternatives like loan assumptions or modifications are less common and not always allowed.
Should I remove my ex-spouse as cosigner during a divorce?
- Yes, it’s highly recommended as part of the separation process. You want to separate all joint finances, loans, and debts. Their name remaining on the mortgage can cause future complications.
**What costs are involve
Disadvantages of removing someone from a mortgage by refinancing
While refinancing to remove someone from a mortgage has advantages, there are drawbacks to consider:
- New mortgage application: The individual retaining the property must independently qualify for the new mortgage, meeting lender requirements for debt-to-income ratio (DTI), credit scores, income, employment stability, and equity. Closing on a refinance loan typically takes around a month.
- Closing costs: Refinance closing costs typically range from 2% to 5% of the loan amount, which can be a significant burden for homeowners already navigating the financial complexities of separation or divorce. However, it’s important to calculate whether your new loan offsets the expense of removing an ex spouse’s name from the mortgage.
- Interest rate variability: Depending on market conditions, mortgage interest rates may be higher than the original loan, increasing monthly payments and overall interest.
As a disclaimer, while this information is meant to be educational, it’s essential to remember that it does not constitute financial advice. First-time homeowners should carefully consider their options and seek expert guidance before making decisions about their mortgage debt.
Selling the house: Fresh start for both parties
If neither borrower can afford the mortgage on their own, the only option may be to sell the home. This would remove both you and your ex from the home loan and provide a fresh start for both of you.
Fortunately, there’s still a strong seller’s market in many parts of the nation, as housing has been in short supply for some time. So it may be possible for home sellers to get a great offer on their property.
However, if real estate prices have fallen instead of rising, selling the home could be much more challenging, especially if you recently bought the home and made the minimum down payment.
If the mortgage is underwater, you may have to opt for a “short sale.” This is a property sale in which the net proceeds don’t fully cover all the liens on the property.
In less fortunate circumstances, your mortgage lender can sue you for the difference between the foreclosure sale proceeds and the remaining loan balance. This is called a “deficiency,” but in many states, mortgage lenders can’t come after you for this. Even if the lender releases you from liability, your credit score and your spouse’s will be negatively impacted by a short sale.
Keep in mind that selling the home could create a new tax burden. Proceeds from home sales can be subject to the capital gains tax. Capital gains tax is a levy imposed by the IRS on profits made from the sale of an asset.
You probably won’t owe capital gains tax if you’re selling your primary residence and owned it for at least two years, but you still might if your earnings exceed the specified thresholds:
- Up to $500,000 in profits is tax-exempt for couples filing jointly
- Up to $250,000 in profits is tax-exempt for individual filers
These exemptions won’t apply if you’re selling jointly-owned investment property. In that case, you could owe capital gains taxes on all proceeds from the sale. Your professional tax preparer will know how to report your capital gains to the IRS.
How To Remove A Co-Signer From Your Mortgage
FAQ
How can I remove a cosigner from a mortgage without refinancing?
How long before you can remove a co-signer from a mortgage?
Can you remove someone as a cosigner on a mortgage?
Can a joint mortgage be transferred to one person?
Can I remove a cosigner from a mortgage?
Removing a cosigner or co-borrower from a mortgage almost always requires paying off the loan in full or refinancing by getting a new loan in your own name. Under rare circumstances, though, the lender may allow you to take over an existing mortgage from your other signer. Here’s what you need to know about this thorny process.
Can you get a mortgage with a co-signer?
If you’re looking to apply for a conventional loan with a co-signer, they’ll need to sign the home loan and agree to repay the mortgage if the primary occupant defaults. However, the co-signer doesn’t need to be on the home’s title. The lender looks at both your credit and the co-signer’s credit to determine if you can get a loan.
Can a loan modification remove a co-signer?
However, some lenders may allow loan modification to remove a co-signer if you give them a significant reason, such as a divorce. 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.
Can a refinance remove a co-signer from a mortgage?
Technically, no. Only a refinance by the primary borrower – a brand new mortgage without a co-signer, or with a different co-signer – can remove a co-signer from their obligation under the co-signed mortgage.