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How to remove co borrower from loan

how to remove co borrower from loan

In order to remove a co-borrower from a loan, you must refinance or modify the loan. A refinance is when you get a new loan to pay off the existing one, and a loan modification is when the loan terms are altered. However, there are additional options to consider. 

About 30% of Americans have poor or bad credit and struggle to get funding.1 If you’re thinking of using a co-borrower to get a loan, keep reading to learn the benefits and what steps you can take to adjust a loan agreement. 

What Is a Co-Borrower?

Bad credit scores can make it hard for consumers to qualify for a loan. And if a person does obtain a loan offer, the repayment terms will not be ideal since bad credit affects interest rates

Loans have a risk-based pricing system. Lenders will offer loan terms that offset the financial risk if your credit history shows you are an unreliable borrower. As the sole borrower, you will have to pay more interest fees due to bad credit. But if a borrower has good credit, lenders may offer reduced prices on loans and higher loan amounts. 

Applying for a loan with a co-borrower can help low-credit borrowers obtain the following benefits:

  • Higher loan amount eligibility
  • Better interest rates
  • Increased approval chances
  • Potential tax benefits
  • Building credit history
  • Support during financial hardships

A co-borrower shares financial responsibility with the primary borrower. When a monthly payment is due, both parties are responsible for paying. For example, when you apply for a mortgage loan with your spouse, you have decided to pay off the loan together and share ownership of the property. The lender will list you and your spouse as co-borrowers on a joint mortgage loan. With the joint mortgage loan, the lender will require information and documentation for both applicants. 

For additional information on home loans, read the breakdown of a personal loan vs mortgage loan

How Is a Co-Borrower Different From a Co-Signer?

A co-borrower, also known as a co-applicant, is very similar to a co-signer, which is why many consumers confuse the two terms. However, the level of financial responsibility a person has is the main difference between a co-signer and a co-applicant. Co-borrowers share equal responsibility for monthly mortgage payments on the loan, but co-signers act as a financial backup. 

Suppose you take out a joint auto loan with your significant other and you become unemployed and can’t pay bills. In that case, your partner must continue making auto loan payments because they share vehicle ownership. Co-signers are not responsible for making monthly payments right away. Still, they are responsible for the remaining loan balance if the primary borrower cannot continue paying off the cosigner loan

Why Do Consumers Remove Co-Borrowers From a Loan?

There are various reasons why borrowers make adjustments to their loan agreement. Still, the two most common reasons include a relationship fallout and financial strain.

  • Relationship Fallout — Relationships are constantly changing, and unfortunately, fallouts do occur. Suppose you and a spouse used installment loans to furnish your joint apartment. An unexpected dispute can crumble the relationship, and you may want to become the sole borrower. 
  • Financial Strain — Dealing with unexpected financial issues can be incredibly stressful. When a co-borrower falls on hard times, a joint loan can place additional strain on their finances. If they cannot afford to keep making monthly mortgage payments, removing them from the loan may be ideal. 

Comparison Chart of Options for Removing a Co-Borrower From a Home Loan

Here is a quick overview of your options for removing a co-borrower from a home loan. If you are weighing your options, pay close attention to the pros and cons of each option. 

OptionDescriptionProsConsBest For
Refinance LoanObtaining a new loan to replace the existing mortgage.– Potentially lower rate
– Can adjust loan terms
– Requires credit check
– Possible fees
Borrowers with improved credit history
Loan ModificationAltering the terms of the current loan without refinancing.– Avoids complete refinancing
– Can be quicker
– Limited availability
– May not change interest rate
Minor adjustments to loan terms
Loan AssumptionOne borrower takes over the full responsibility of the existing loan.– No need for a new loan
– Keeps current loan terms
– Requires lender approval
– Full financial responsibility for one borrower
When one borrower can handle the loan solo
Quitclaim DeedUsed for property loans, transfers property title but not the loan responsibility.– Changes property ownership
– Relatively simple process
– Does not remove name from mortgage debt
– Legal implications
Changing property ownership
Selling the AssetSelling the property or asset and using the proceeds to pay off the loan.– Clears the loan
– Potential profit from sale
– Loss of property/asset
– Market-dependent
When neither party wants to keep the asset
Paying Off the LoanCompleting the remaining payments to fully settle the mortgage.– Immediate release from loan
– Positive credit impact
– Requires available funds
– May strain finances
When nearing the end of the loan term

How To Remove a Co-Borrower From a Loan

Removing a co-borrower from a loan is possible, but the removal process may be difficult. Unlike a co-signer, a co-borrower has equal ownership of assets and shares financial responsibility. If you applied with a co-borrower due to a low FICO score, your lender might be hesitant to remove them from the loan contract.

Closely examine your loan agreement to determine if the lender allows the removal of a co-borrower. Many lenders will enable the release of a co-borrower under certain conditions. For example, you must first repay a certain percentage of the loan. Ask your lender for clear answers if you have any questions about your loan. 

Below are a few ways you can remove a co-borrower from a loan: 

Refinance the Loan 

Refinancing may be the simplest way to remove a co-borrower from a loan. The refinance process means applying for a new loan to replace an existing one. Borrowers often refinance to get a lower interest rate or extended repayment length. But refinancing can also help borrowers add or remove co-borrowers to a loan. 

If your credit score has improved since you obtained your existing loan, you may quickly get approval for a refinanced loan. However, you may have difficulty getting a loan offer if your credit score has since decreased. Borrowers can choose to apply with the same lender or a new one.  

Sell the Asset

If you obtained secured loans with a friend or family member, such as an auto or mortgage loan, you could sell the asset to free yourself of the loan. If neither co-borrower wants the asset, you can both agree to sell it. 

Suppose you have a buyer that wants your financed vehicle. In that case, you can talk to the lender about transferring the vehicle title. To buy a financed car, the potential buyer must apply with the lender and meet the eligibility requirements. If the lender agrees to a title transfer, the buyer assumes financial responsibility for the remaining loan balance. 

Borrowers can sell real estate with conventional or FHA loans attached. Ideally, the home should have equity, as you are more likely to find a buyer. Once you sell your property, you can use the proceeds to pay off the mortgage loan and split the remaining profit with your co-borrower. You can consider a loan assumption if only one co-borrower wants the property. 

A loan assumption is a process that allows a borrower to assume full financial responsibility and take over existing mortgage payments. The loan terms do not change with a loan assumption, but it releases the co-borrower from the financial obligation. 

If your co-borrower wants to relinquish their claim on the property, they can file a quitclaim deed. A quitclaim deed allows a property owner to relinquish ownership rights. If your co-borrower files this type of deed, you gain whatever interest the co-borrower has in the property. 

Pay off the Loan 

If you only have to pay a few more monthly payments, you can pay off the loan with your co-borrower. Paying off debt releases both borrowers from the financial contract. Paying debt can positively impact your debt to income ratio, which looks good on a credit report. Having less debt to your name can make qualifying for a loan easier without asking someone to co-sign. 

FAQs About Removing a Co-Borrower from an Existing Mortgage

Can a mortgage lender refuse to remove a co-borrower’s name from a mortgage?

Yes, a mortgage lender can refuse to remove a co-borrower’s name if it doesn’t meet their policies or if it increases their risk. It’s always good to check with your lender for specific terms.

How does removing a co-borrower affect the interest rate on the existing mortgage?

Unfortunately, removing a co-borrower from a loan can negatively affect your rate, especially if your previous co-borrower had a better financial history than you. Your mortgage lender might reassess the loan and possibly adjust the rate.

Is it possible to remove a co-borrower’s name from a mortgage without a mortgage refinance?

Absolutely! While refinancing is common, alternatives like a loan modification or a loan assumption might work, depending on your lender’s policies.

What is a quitclaim deed, and how does it relate to removing a name from a mortgage?

A quitclaim deed is a legal way to transfer property ownership. It can remove a person’s name from the property title but not from the mortgage debt. You’ll still need to work with your lender to remove the name from the mortgage.

Can removing a co-borrower from a joint mortgage impact my credit history?

Indeed, it can. If you’re taking on the entire mortgage loan yourself, it could affect your debt-to-income ratio, which is a part of your financial history. It’s wise to consider this before making a decision.

What are the risks of a loan assumption in removing a co-borrower from a home loan?

With a loan assumption, the risk lies in whether you can handle the entire mortgage debt on your own. It’s a big financial responsibility, so make sure you’re ready for it.

How does a new loan for mortgage refinance work when removing a co-borrower?

When you refinance, you’re essentially getting a new loan to pay off the existing mortgage. This new loan can be in just your name, effectively removing the co-borrower from the mortgage.

What should I consider before removing a co-borrower from my mortgage loan?

Before you go ahead and remove a co-borrower from your home loan, think about your financial stability, the impact on your rate, and whether you can handle the mortgage debt solo. Also, consult with your mortgage lender to understand all your options.

If we have an FHA loan, does that affect the process of removing a co-borrower from the mortgage?

Yes, having an FHA loan can impact the process because they have specific rules and requirements. For instance, if you’re looking to remove a co-borrower, you might need to go through a loan assumption process or refinance into a non-FHA loan. It’s always wise to check with your lender or a mortgage expert to understand how your FHA loan might affect the process of removing a co-borrower.

Can a loan modification help in removing a co-borrower from our current mortgage?

Yes, a loan modification involves altering the terms of your current mortgage, which might include removing a co-borrower. However, it’s important to note that loan modifications are typically used to make loan repayment more manageable, not always for changing borrowers.

A Note From CreditNinja on Removing a Co Borrower from a Mortgage Loan 

There are various ways to remove a co-borrower from a loan. However, your ability to adjust your loan depends on your lender and your loan contract. Read your agreement carefully to determine what steps you can take. If you have any questions, ask your lender to clarify your options.

If you are looking for a refinancing option, consider using a CreditNinja personal loan! Our installment loans are affordable for many customers and we offer funding nationwide. Apply online today to see if you qualify to get emergency funding in your state. 

References:

  1. How Many Americans Have Bad Credit? │ Fox Business 
  2. How to Remove a Cosigner From a Car Loan │ JD Power
  3. Should I Sign A Quitclaim Deed During (Or After) Divorce? │ Divorce Mortgage Advisors
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