If I Refinance, Can I Have a Co-Borrower Removed From the Loan?

Young adults without established credit often need a parent's help to qualify for an auto loan, student loan or home loan. As you begin building your credit, you might find you no longer need another name tied to your loan. If so, refinancing lets you to remove a co-borrower from a loan. In fact, it is often the only way you can remove the other name.

Credit

To refinance a loan, you must meet the lender's minimum credit requirements without the help of your co-signer. If your credit score is not as high as the other borrower, brace yourself for the possibility of higher interest rates than you are currently paying. A good payment history on the current loan will work in your favor. As long as you do not have accounts in collection, judgments, or a late payment history on your other revolving lines of credit, you have a shot at meeting the credit criteria.

Income

After passing the credit test, you must prove you can make the loan payments. You previously qualified based on two incomes, but now yours alone will have to be sufficient. It is best to wait until your income has increased before considering refinancing. Lenders will want recent pay stubs, W-2 forms and tax returns as proof of your income.

Debt-to-Income Ratio

Even with documents that show you earn enough money to cover the loan payment, lenders will need to assess your debt-to-income ratio. A borrower could have what appears to be an adequate income on paper. However, a high income means nothing if the borrower has high payment obligations as well. To calculate your debt-to-income ratio, first add up all your monthly debt payments. Divide the total from your gross monthly income. Ideally, you want the ratio to be below 36 percent.

Considerations

If you can't qualify for financing and still want to remove the co-signer, consider asking someone else to co-sign. When removing a borrower from the loan, you will also want to remove the name from the car title or deed. Although you don't need the co-signer to refinance, you will need his cooperation to sign over rights on the title or deed. If you don't remove the name, he could end up owning half the home or vehicle you paid for on your own.