When an applicant falls short of qualifying for a mortgage on their own, they may use a cosigner, commonly referred to as a co-borrower, to make them more creditworthy. Having someone with good credit and income cosign mortgage documents increases the chances of being approved, and may even result in better loan terms. Once a home loan is finalized, removing a co-borrower from a mortgage loan generally cannot happen, nor can a name be added, without refinancing the loan entirely.
TL;DR (Too Long; Didn't Read)
Refinancing is typically the only valid process for removing a co-borrower from a mortgage loan and adding another cosigner or co-borrower. Consider the cost and consequences of refinancing before asking someone to cosign mortgage documents.
Cosign Mortgage Applications
To qualify for a mortgage loan, borrowers must meet certain requirements determined by the lender. Generally these requirements include good credit scores and stable income. The lender runs a credit check on the borrowers and then usually asks the borrowers to submit some financial documents to verify their income. The lender wants to ensure the borrowers earn enough to afford the monthly loan payments. A cosigner can help your chances of getting a loan, or receiving better loan terms, when the cosigner has as good or better credit than you have and a steady and verifiable income. A cosigner with bad credit or no income is likely to hurt your application or loan terms.
Cosigners vs. Co-Borrowers
Ideally, your cosigner should be in a better financial situation than you. The lender will review the cosigner's credentials and then make a final decision. The cosigner holds a financial responsibility to repay the loan, but won't be on the deed to the property. Only co-borrowers, which are essentially second borrowers on the loan, go on title. The cosigner retains this responsibility until the loan is paid in full. If the primary borrower defaults on loan payments, the lender can try to collect the past-due amount from the cosigner. The home loan will also appear on the cosigner's credit report for the total loan amount.
Reasons for Removing Name From Mortgage
In order to add or remove a cosigner or co-borrower from your home loan, you must refinance. The refinancing process consists of applying for a new loan. The new loan is used to pay off the original home loan. It's common for borrowers to refinance their mortgages to obtain better interest rates, extend the loan's term or reduce monthly payments. Because a refinanced loan is a completely new loan, a cosigner can be removed and a new cosigner or co-borrower can be added. Once the refinance is complete, any financial responsibility towards the old loan is considered fulfilled or satisfied. Removing your ex spouse from a mortgage, or removing an unneeded co-borrower from a mortgage loan are common reasons for refinancing.
Considerations for Cosigners
To cosign mortgage documents for someone is a serious obligation. Regardless of how well you know the borrowers or how much you trust them, you might end up paying for their default down the road. Cosigners should take a pro-active approach to ensure that the loan is being paid on time each month. Missed payments will negatively affect the cosigner's credit score as well as the borrower's. The lender might be willing to work with the cosigner by providing notification of any missed payments. However, there are cases where people simply need a few years to build up their credit score. After that, they can refinance the loan and remove the cosigner.
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