Depending on your credit score or income, you may have needed a co-signer for your mortgage. Discover how to remove co-signers from the mortgage when you no longer need their assistance.
Some lenders let you remove a co-signer with a co-signer release form, but this is not always an option. The best option for most people will be to refinance the mortgage without the co-signer. However, in these cases, the homeowner needs to be in good financial standing, or they won't be approved for a loan on their own.
Take a closer look at the process of removing a co-signer from a mortgage, as well as everything else you need to know about co-signing a mortgage or other major loan.
Your Guide To Removing A Co-Signer From A Mortgage
Most people dream of becoming a homeowner. However, lenders won't want to give you a mortgage unless your credit score is at a certain level and you have a steady income. Fortunately, you can find a co-signer if you can't get approval for a mortgage on your own.
What Is A Co-Signer?
A co-signer bears financial responsibility for the mortgage, but they don't have any rights to your property. They simply provide a guarantee that you will make your mortgage payments. If you fail to make payments to the lender, your co-signer is legally obligated to repay the mortgage.
Your co-signer will typically have a better credit score or a higher income than you. You get to take advantage of his or her financial stability to be approved for a loan.
What Rights Does A Co-Signer Have On A House?
Co-signers don't usually have any rights to the mortgaged house. They are responsible for the mortgage payments but get no benefit in return.
Co-Signing Requires Trust
You will notice that there is a financial risk for the co-signer. If you miss payments, they have to make the payments themselves. If you default on the mortgage, they have to pay. Missed and defaulted payments can also negatively affect their credit score. On top of that, collections can reach out to you for the loan amount – and they can do so before they reach out to the primary borrower. And in return for all this, they get a "thank you" and nothing more, at least not legally.
As such, choosing to co-sign for someone's mortgage or another type of loan requires a great deal of trust. You have to trust that the person you are co-signing for will make payments or at the very least let you know they are behind so you can pay. At the very least, the fact that co-signing a mortgage is a secured loan makes it less risky for the co-signer than an unsecured loan would be. While the co-signer's credit score could still be affected, lenders could seize the house if the borrower doesn't make payments.
Because cosigning is a risk without any benefit other than helping someone own a house, it is most common for family members to co-sign for each other. For example, parents may co-sign for their children. This is one way parents can help secure their child's financial future.
Why Co-Signers Want to Be Removed
The risk associated with co-signing is part of the reason that most co-signers prefer to get off the loan as soon as they can. Doing so reduces their financial risk. Some co-signer may even require the homeowner to remove them from the loan as soon as possible.
Only The Main Borrower Can Start The Process To Remove The Co-Signer
While it is in the best interests of a co-signer to be removed from the loan, it is not up to them. When they co-sign for a loan, they are making a commitment for the life of the loan. Whether it is via refinancing or getting a co-signer release form, the primary borrower must initiate any method of removing the co-signer from the loan.
How To Get A Name Off Mortgage
There are two main options to get a name off of the mortgage. You can fill out a co-signer release form or refinance the mortgage.
Cosigner Release Form
It's important to keep in mind that not all lenders offer a co-signer release form. If you know you will want to use this option to remove someone from the mortgage in the future, make sure to choose a lender that offers it. But using a co-signer release form is not as simple as filling out the form.
The primary borrower can request for a co-signer release form. They will also need to sign off on the form to release the co-signer from their obligations. But, more importantly, the lender will also have to approve the co-signer being removed.
Lenders are unlikely to provide approval for this method unless they believe the primary borrower will make payments on time and in full. This typically requires the borrower to have improved their credit score or income since they originally applied for the loan.
Refinance The Mortgage
Given that not all lenders offer a co-signer release form, most people end up refinancing to remove their co-signer. This is the most common method because as long as you can be approved for refinancing, it is an option.
Sell The House And Pay Off The Loan
The previous two options are the only ways to still have a mortgage and remove the co-signer. But there are also ways to get rid of the loan entirely, which would free the co-signer of their obligation. It would also free the primary borrower from theirs.
One option is to sell the home. Then, the borrower would use the proceeds to pay off the remaining mortgage balance. This would pay off the mortgage and end the agreement.
Pay Off The Loan Without Selling The Home
The other option is for the main borrower to pay off the mortgage with a lump sum without selling the house. Of course, this will require a large amount of money, so it is more common to be the case if the borrower has an unexpected windfall.
Getting Approval For Refinancing Or A Co-Signer Release Form
Whether you choose to remove the co-signer via a release form or refinancing, the main borrower or homeowner will have to show that they can make the payments themselves. As mentioned, lenders won't sign off the co-signer release form if they don't think the primary borrower will make payments. Similarly, the lender won't offer a new home loan (i.e., refinance) if they don't think the borrower can pay.
As with any other type of loan, you can expect the lender to look at a few factors when considering whether to approve you for refinancing or a co-signer release form:
- Credit score
- Debt-to-income ratio
- Assets (including the value of the home)
The value of the home could work in the borrower's favor if it has increased since the purchase. After all, it would mean that the primary borrower has more assets.
Payment History On The Loan
In the case of removing co-signers, it is also likely that the lender will take a closer look at the payment history for the loan so far. If you, as the primary borrower, have made each of the loan payments on time, they are more likely to approve you. You will have shown that you can make the payments yourself.
By contrast, if your co-signer has had to make some of the payments, you are much less likely to be approved. It would be a black mark that could potentially disqualify you.
Refinancing? Understand Cash-Out vs No-Cash-Out Refinancing
Assuming you are refinancing the mortgage, then there will be two main options: cash-out and non-cash-out refinancing. Non-cash-out refinancing just changes the loan terms. It may adjust the interest rate, period of the loan, or something else. It may also just include removing the co-signer from the mortgage (although doing so is likely to change the interest rate).
A cash-out refinance, on the other hand, will increase the amount of debt the borrower owes. This type of refinancing takes advantage of the home equity the borrower has earned so far. It liquidates part of that equity to get cash in hand. This can be a useful option if you have emergency bills to pay or want money for renovations.
But you should always be cautious about a cash-out refinance. Remember that it will increase the amount you owe, including both the principal and the interest. Additionally, it may be easier to be approved for a non-cash-out refinance than a cash-out one as the amount you borrow is lower. This reduces the risk for the lender.
Depending on your credit score, income, or debt-to-income ratio, you may need a cosigner to be approved for a mortgage. There are two main ways of removing a co-signer from a mortgage: a mortgage release form and refinancing. You could also pay off the balance of the home loan, but this is not feasible for most people.
Regardless of the situation, co-signing is a financial risk. It legally requires the co-signer to make payments if necessary but doesn't give them any rights to the home.
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.