When you're ready to untangle your financial lives from your parents or grandparents, one of the biggest hurdles is removing the co-signer on your mortgage. If you bought a home when your incomes and credit scores were low, you may have needed the co-signer to qualify for the mortgage. But now that you're earning more and have better credit, you're probably antsy to get your parent or other loved one off your mortgage. Lenders rarely agree to remove a co-signer, so to do so you almost certainly need to refinance your mortgage without the co-signer.
Discuss Plans With Co-Signer
Before you dig into the process, let your co-signer know what you're planning to do. If anything, the co-signer will probably be relieved to be released from the obligation, given that the co-signer has full legal liability to pay the mortgage if you don't. Regardless, it doesn't hurt to discuss your plans and let the co-signer know what you're planning to do. Later in the process, the co-signer will need to sign a quitclaim deed to release any claim to ownership in the home.
Boost Your Credit Scores
Your credit scores will have a significant impact on whether you qualify for a mortgage on your own, and if so, what interest rate you will get. Therefore, you both need to work on boosting your credit scores before you apply. Some quick techniques include disputing incorrect negative information on your credit report, paying down credit card balances and catching up on any past-due accounts.
Check Debt-to-Income Ratios
You're going to need sufficient income to support your monthly payment if you hope to qualify for a mortgage without a co-signer. Before you apply for a refinance, you'll want to check two debt-to-income ratios. Calculate your projected monthly payment by plugging today's average interest rates and the current balance of your mortgage into a mortgage calculator. Add the monthly portion of your homeowner's insurance and property tax to get your projected monthly housing cost. When you divide your combined monthly income by your monthly housing cost, the result must be 0.28 or less to qualify for a mortgage. For the second ratio, divide your income by the sum of your housing cost and all of your other monthly debt payments. The result for this must be less than 0.36 to qualify.
Refinance Your Mortgage
Once you've done all your homework, all that's left is to refinance your mortgage with the lender of your choice. Getting interest rate quotes from several lenders helps you select the best one. You'll need to provide documentation of income, bank account balances, and other financial information to support the underwriting process. Let the loan officer know that you are refinancing to remove the co-signer from your mortgage so the loan officer will prepare the paperwork needed for that part of the transaction. You will have to pay closing costs on the mortgage, but many lenders let you roll the costs into your loan balance if you don't have enough cash on hand.
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