When you're young and have a limited credit history, you may use a cosigner to qualify for a car loan, student loan or mortgage. However, after you and your spouse reach a point of financial stability, it may be beneficial to cancel the cosigner relationship. The method you must use for removing the cosigner depends on the type of loan he cosigned.
When an individual agrees to cosign a loan, he promises to pay the balance of the loan if the borrower is unable to do so. In most cases, a cosigner agrees to be responsible for a loan because the borrower doesn't meet the lender's qualifications. For this reason, lenders are reluctant to release the cosigner from the obligation unless the borrower's income or credit score has improved enough to qualify him for the loan on his own.
Mortgage and Car Loans
Few lenders will remove a cosigner's name from an existing mortgage or car loan. To cancel the cosigner relationship, typically you must refinance the loan without including the cosigner. To complete the refinancing, you and your spouse must show that your income and credit rating is sufficient to qualify you for a new loan equal to the balance remaining on your existing mortgage or vehicle loan. When the refinancing is complete, your cosigner will be free of any obligation to pay your debt.
Many student loans have a cosigner release clause, which allows the cosigner to be released from his obligation if the borrowing student makes the loan payments on time for a certain number of months. You may also remove a cosigner from a student loan by refinancing it. Just as with a mortgage or car loan, you may not refinance a student loan without the cosigner unless your income and credit score meet the lender's requirements.
If you are unable to qualify for refinancing of a mortgage, car loan or student loan on your own but you need to remove your cosigner, you may be able to obtain a new loan with a different cosigner. Cosigners may also be able to cancel their obligations to repay a loan through bankruptcy. However, the bankruptcy will lower the cosigner's credit score.
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