Modifications have the primary purpose of getting borrowers back on track with mortgage payments. Lenders voluntarily accept loan modification requests, but if debt and income calculations don't fit guidelines, the lender can reject your modification altogether. You'd have to convince the lender that eliminating a co-borrower is not just some tactic to get a modification, which can be difficult. Refinancing a home loan to remove a co-borrower is the most common and likely solution for parting ways with a co-owner.
Modification Qualifying Basics
Lenders reduce your mortgage payment via modification in several ways. They can temporarily or permanently reduce your interest rate, extend the loan term, or defer or reduce a portion of the principal balance. You generally must submit income, asset and debt paperwork, proving you have the means to keep up with a modified payment, and a legitimate financial need. Lenders also make you complete a three-month trial period before granting a permanent modification.
Debt-to-income ratios compare your monthly debt payments to monthly gross income. To ensure that you can afford the modified payment, lenders set a max total-DTI limit, which accounts for your housing payments and other recurring debts. For example, the federal Home Affordable Modification Program, or HAMP, has a floor-limit for modified housing payments of 25 percent. This means that the lowest your payment can go as the result of a modification is 25 percent of your gross income. It also has a total DTI limit of 42 percent, meaning your total debt payments can't exceed 42 percent of your income. Lenders evaluate DTI for all borrowers responsible on the mortgage -- primary and co-borrowers.
Why Lenders Say "No"
Removing a co-borrower in order to modify a loan may seem fishy to the lender. To prevent borrowers from misusing a modification to get their payments down to a ridiculously low level, lenders set a floor debt-to-income ratio. Removing a co-borrower during a modification might help you meet DTI requirements, which might raise red flags with the lender. Also, a modification involves revising the terms of your original loan agreement, rather than replacing your loan with a completely new loan.
Possibility of Removing a Co-Borrower
A refinance pays off an existing loan with an all-new loan. It's the most common way to remove a co-borrower's responsibility for a mortgage. Divorcing couples, for example, can split up the marital home with a refinance. In order for a lender to consider removing a co-borrower in a modification, the lender would need to see compelling evidence of a financial and personal split up, such as court documents for legal separation or a divorce decree. The last thing the lender wants is to give a loan modification to borrowers who don't need it, and let a borrower who's no longer on the hook for the loan continue to enjoy the house.
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