When you're ready to untangle your financial life from your parents, grandparents or ex-spouse, one of the biggest hurdles is removing a name from a mortgage. If you bought a home when your income and credit score 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. If you're removing an ex-spouse from a mortgage, you may wish to notify the person's attorney.
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 and your significant other 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 0.43 or lower to get qualified mortgages, which have more restrictions for homeowners. Ideally, your ratio should be 0.36 or below to qualify for typical mortgages.
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 can 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.
Don't Forget the Quit Claim
You and the previous co-signer must file a quit claim deed with your jurisdiction before the transaction is complete. This cosigner release form of the mortgage takes away the person's responsibility for the mortgage or any liens on the property. It also protects you if the co-signer decides to make a claim to your property one day. While you and your co-signer may trust each other, it's still important to get this agreement in writing and filed with the state. Each area has different rules and regulations regarding quit claims. Be sure you know the exact rules in your area. Generally, quit claims include a legal form, signatures from both parties, and a detailed description of the property in question. You or your attorney then file the form with the county office and the co-signer no longer has legal rights or responsibilities.