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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.
Cosigner vs. Co-Borrower
The procedures (and difficulty) of removing a co-borrower or a cosigner from a mortgage are largely the same, but the terms are not synonymous.
- A cosigner is someone who agrees to accept financial responsibility for the mortgage if you are unable to make your mortgage payments. This is typically necessary when you, as the primary borrower, lack sufficient credit to qualify for the mortgage on your own. Cosigners typically have no ownership stake in the home, and their names do not appear on the title to the house.
- A co-borrower is someone who assumes a financial stake in the house being purchased and is also named on the title to the house as a co-owner with you. When the house is sold, they are entitled to a share of the proceeds—typically an equal share with you, unless the paperwork indicates otherwise.
If you have a cosigner or a co-borrower, they will submit their financial information along with yours as part of the mortgage application. The lender will consider their income, debt and credit along with yours when deciding if you qualify for the loan and, if so, what to charge you in terms of interest rate and fees on the loan.
You and your cosigner or co-borrower have equal responsibility for ensuring mortgage payments are made on time as agreed in your loan contract. Missed or late payments will damage everyone's credit scores, and if the property is foreclosed on, that negative information will appear on all parties' credit reports.
When Can a Co-Borrower Be Removed From a Mortgage?
After issuing your mortgage based on the pooled financial strength of you and a cosigner or co-borrower, your lender may be reluctant or simply unwilling to remove either party from the loan. It never hurts to ask, however: The lender may be willing to issue a loan modification that leaves you the sole party to the loan.
As a practical matter, however, for you to be able to take over the loan on your own, one or more of these circumstances typically must apply:
Liability Release Clause
The mortgage has a liability release clause that allows for any party to the loan to be removed from the contract with the lender's approval. These clauses are not common in mortgage contracts and, even if yours has one, the lender still has the right to deny the request.
The mortgage is assumable, which means it allows a buyer to take over payments from the seller. Government-backed mortgages are often assumable, but conventional mortgages seldom are.
Even if your loan is assumable, the lender may require you to prove you can make the payments on your own before letting you take it over on your own, and the seller—in this case, your co-borrower or cosigner—may remain financially obligated to make payments if you fail to do so.
You can earn the lender's approval by showing that you are sufficiently creditworthy and have the means to cover the mortgage payments yourself. This may require:
- Showing that your credit scores have improved since you made the original application.
- Documenting that you have sufficient income to make the mortgage payments on your own, and that your other debts—measured using debt-to-income (DTI) ratio—will not interfere with your ability to pay the mortgage. (If you can show that you've already been covering payments on your own for a period of months or years, that's a good start.)
Meeting these requirements can be difficult, particularly if the reason you needed a cosigner or co-borrower in the first place was poor or insufficient credit. Even if your income has increased significantly, unless your credit scores have also improved in a major way, your application isn't likely to be successful.
In light of that, the lender is probably going to require you to either:
- Repay the loan in full to remove your cosigner or co-borrower (and yourself) from the mortgage by closing out the loan. Unless you have access to a significant source of ready cash, this typically requires selling the house.
- Refinance the loan. Take out a new loan in your own name, based solely on your income, debt level and credit scores, which you'll use to finance the house, pay off the remainder of the original mortgage and, if you have a co-borrower, buy out their stake in the property (a move that may require you to get a cash-out refinance).
Depending on how recently you took out your original mortgage, meeting the requirements for a new loan in your own name could be challenging, and so could meeting the monthly payments, which could be higher than on your original loan thanks to recent interest-rate hikes.
What Are Your Options if You Can't Get a Co-Signer Removed?
If your mortgage lender won't remove your co-borrower or cosigner from the mortgage, and you're unable to qualify for a refinance loan, your options are few.
Sell the House
This is the likeliest scenario in a situation where neither party can (or wants to) take over the mortgage on their own.
Ideally, the house will be worth more than it was at the time of purchase, and you can walk away with some cash that you may be able to put toward the down payment on a more affordable new home.
If the house is worth less than you paid for it, or if circumstances otherwise mean you owe more on your mortgage than you can get from selling the house, you're considered "underwater" on your mortgage and may need to negotiate with your lender to arrange a short sale, which can cause significant harm to your credit scores.
If you're really in a bind, you can have your cosigner or co-borrower declare bankruptcy.
If your cosigner or co-borrower files for bankruptcy and their obligation to pay the mortgage is discharged, the lender will remove them from the loan. Note that, if any mortgage payments are late or missed in the run-up to a bankruptcy, they'll hurt both your credit scores and those of your co-borrower or cosigner, and that bankruptcy can't prevent a lender from foreclosing if you default on the mortgage payments.
What Are the Potential Consequences of Removing a Cosigner?
Taking on sole responsibility for a mortgage—either by removing a cosigner or co-borrower or refinancing with a loan in your name only—is a big commitment and comes with significant risk. If you've been paying your mortgage yourself all along, chances are good you fully understand what's involved. If you're taking over payments you previously shared with a co-borrower, the situation could be a bit dicier.
Some thoughts to bear in mind:
- A larger monthly mortgage obligation will increase your DTI ratio, and that could make it more difficult to qualify for credit or loans in the future. If you expect to finance a car or seek a student loan in the next few years, it's worth calculating your DTI ratio to see what it will be with the new mortgage and whether that will affect your borrowing power.
- If any loss of income will put you at risk of missing a mortgage payment and, ultimately, of foreclosure, it becomes extra critical to have a solid emergency fund of six months' to one year's worth of monthly expenses available to get you through any rough patches.
The Bottom Line
Getting a co-borrower or cosigner removed from your mortgage can be difficult, if not impossible. But whether you're trying to prove to a lender that you can be trusted to take over your existing mortgage, or seeking a new one to refinance your home, it's important to make your credit scores as good as they can be. Check your FICO® Score☉ from Experian for free, and consider taking steps to get your credit mortgage-ready before you make your case.