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 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-borrower. 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.
| Option | Description | Pros | Cons | Best For |
| Refinance Loan | Obtaining 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 Modification | Altering 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 Assumption | One 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 Deed | Used 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 Asset | Selling 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 Loan | Completing 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
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.
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.
Absolutely! While refinancing is common, alternatives like a loan modification or a loan assumption might work, depending on your lender’s policies.
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.
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.
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.
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.
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.
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.
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:
