How to Remove a Co-Signer From a Mortgage

A mortgage co-signer is someone who agrees to share the financial responsibility of a home loan with the primary borrower. This arrangement is often made to help the primary borrower qualify for the mortgage or secure more favorable loan terms. Over time, circumstances can change, leading the primary borrower to consider removing the co-signer from the mortgage. This process can be complex, involving various financial assessments and procedural steps, and understanding the options available is important for all parties involved.

The Co-Signer’s Role on a Mortgage

A co-signer on a mortgage undertakes legal and financial obligations. By signing the loan documents, a co-signer agrees to be equally responsible for the debt if the primary borrower is unable to make payments. If the primary borrower defaults, the lender can pursue the co-signer for missed payments. This shared responsibility legally binds the co-signer to the loan, even if they do not live in the home or have any ownership interest in the property.

The co-signer’s credit is affected by the mortgage. The loan appears on their credit report, impacting their debt-to-income (DTI) ratio and credit utilization. If the primary borrower misses payments, the co-signer’s credit score will also be negatively impacted. Conversely, consistent, on-time payments by the primary borrower can positively contribute to the co-signer’s credit history. Due to these financial and credit implications, removing a co-signer is beneficial for both parties once the primary borrower’s financial standing improves.

Assessing Eligibility for Removal

Before removing a co-signer, the primary borrower must demonstrate their ability to independently qualify for the mortgage. Lenders evaluate several financial metrics for eligibility, focusing on the borrower’s credit score, income stability, and debt-to-income (DTI) ratio. A conventional loan requires a minimum credit score of 620, while government-backed loans, such as FHA loans, accept scores as low as 580, or 500 with a larger down payment. A higher credit score leads to more favorable loan terms and a smoother approval process.

Income stability is another factor lenders assess, requiring proof of consistent income over two years, preferably with the same employer or within the same field. This demonstrates a reliable source of funds to cover mortgage payments. Lenders also scrutinize the borrower’s DTI ratio, which is the percentage of gross monthly income allocated to debt payments. A lower DTI ratio indicates a reduced risk for lenders.

Home equity also plays a role in eligibility, particularly for refinancing. It is calculated by subtracting the outstanding mortgage balance from the property’s current market value. Lenders require equity, such as 20%, to avoid private mortgage insurance (PMI) on a new loan, and allow borrowing against 80% to 90% of the available equity. To demonstrate financial standing, borrowers need to gather various documents, including:
Recent pay stubs (30 days to two months)
W-2 forms for the past two years
Tax returns for the previous two years
Bank statements for the past two to three months
Proof of other assets
Current mortgage statements

Removing a Co-Signer Through Refinancing

Refinancing is the most common method to remove a co-signer from a mortgage, as it replaces the existing loan with a new one solely in the primary borrower’s name. The process begins with the borrower applying to new lenders, providing all financial documentation to demonstrate their ability to qualify independently. This application package includes income verification, asset statements, and credit history details. Lenders then initiate the loan underwriting process, which involves a review of the borrower’s financial profile, the property’s value, and the overall risk.

During underwriting, the lender orders a new appraisal of the home. A title search is also conducted to ensure a clear title. Once the underwriting process concludes and the loan is approved, the final step is closing on the new mortgage.

At closing, the primary borrower signs new loan documents, formalizing their sole responsibility for the mortgage. The new loan then pays off the original mortgage, releasing the co-signer from their financial obligation. Borrowers should be prepared for closing costs, which range from 2% to 6% of the loan amount and include title insurance, appraisal fees, and lender fees. A three-business-day rescission period follows the signing, allowing the borrower to cancel the new loan.

Removing a Co-Signer Through Other Means

While refinancing is a common approach, other methods exist for removing a co-signer. One alternative is a loan assumption, where the primary borrower takes over responsibility for the existing mortgage from the co-signer. This option is not universally available, as the original mortgage must contain an assumable clause, and the lender must approve the assumption. The process involves the primary borrower applying to the current lender, who reviews their financial qualifications, including creditworthiness, income, and DTI ratio. If approved, the co-signer is formally released from the original loan agreement.

Another method for co-signer removal is selling the property. When the home is sold, the proceeds from the sale pay off the outstanding mortgage balance. This action releases both the primary borrower and the co-signer from their obligations on the loan. The process involves listing the home for sale, securing a buyer, and completing the sale through a closing, where the mortgage is satisfied. It is important to obtain a payoff statement from the lender to know the exact amount required to clear the mortgage at closing.