How to Remove a Borrower From Your Mortgage
Whether it’s a former spouse, friend, or business partner, you may find yourself needing to remove a name from your mortgage.
For all the major loan types, the only practical way to do this is usually with a refinance. Here’s how to approach this task.
Start your refinance to remove a borrower.
Considerations When Removing a Borrower
Here’s are things to examine no matter what type of refinance you're using to remove a borrower.
Qualify on your own: In most cases, you must qualify for the new loan on your own. This could cause an issue if two incomes were used to qualify originally. However, some programs let you remove a spouse without a re-verification of income or credit.
Home equity: You must have at least 3% equity in the home after the refinance to be eligible. You’ll need more than this if you plan to roll closing costs into the new loan. Those who purchased in the last few years may not have adequate equity.
Higher rates: There’s a good chance rates are higher today than when you got your mortgage. Your payment could rise.
Mortgage vs title: You can remove someone from title by having them sign a simple document. But this does not remove them from being liable for the mortgage.
Try to Dual-Purpose the Borrower Removal
Since you must incur the cost of a refinance anyway, use the opportunity to accomplish other goals.
Take additional cash out
Consolidate debt
Remove private mortgage insurance (PMI)
Lower your rate
Extend or reduce your term
There are many reasons people refinance. Try to complete as many as you can with one transaction instead of getting another costly refinance later.
See if you're eligible for a refinance.
Removing a Borrower from a Conventional Loan
To remove a borrower from a conventional loan, most people refinance into a new one, although it's possible to refinance into FHA or VA. Any way you go, conventional loan rule-makers Fannie Mae and Freddie Mac don’t allow you to simply remove someone from the existing loan obligation.
As mentioned above, this means you’ll qualify for the new loan using only your income and credit. The new house payment and all debts should be no more than around 45% of your gross income and you'll need a 620 credit score.
To receive a 97% loan-to-value refinance, the current loan must be owned by Fannie Mae or Freddie Mac. You can check whether either of these agencies owns your loan with the Fannie Mae or Freddie Mac lookup tools.
If you need to buy out an ex-spouse or partner, look into Fannie Mae’s equity buyout program. It classifies the loan as a no-cash refinance. All loan proceeds above and beyond paying off the underlying loan must go toward paying off the former co-owner.
Refinancing an FHA Loan to Remove a Borrower
There are two ways to refinance an FHA loan into another FHA loan:
Easiest: FHA allows you to remove a borrower with an FHA streamline refinance in the case of divorce, legal separation, or death. There’s no appraisal or income documentation required. You must provide legal documentation for the divorce or separation and show that you’ve made the payments on your own for six months.
Harder: If you don’t have six months of payment history on your own, you can still remove a borrower as long as one original borrower stays on the loan. You don’t need a new appraisal, but you must verify your income.
Another option is to refinance the FHA loan into conventional. You would need 5% equity in the home and meet conventional lending criteria. If you have 30-40% equity, you could even take extra cash out with this option.
Refinancing a VA Loan for Borrower Removal
You can refinance a VA Loan into a new one to remove a borrower in some cases. You don’t need an appraisal or re-verification of income and assets using a VA streamline refinance. Usually, the eligible veteran must be the one staying on the loan.
The non-veteran typically can’t refinance the loan into their name except when the veteran and spouse were obligated on the loan then the veteran died.
VA guidelines state that lenders do not have to re-evaluate the remaining borrower’s income for a streamline refinance. However, lenders may require it anyway.
Another option is the VA cash-out loan, where you can borrow up to 100% of your home’s value to consolidate debt or pay off an ex-spouse.
You can also refinance a VA loan into a new conventional loan. You will have to qualify for the loan with adequate home equity, income, and credit.
Refinancing to Remove a Borrower from a USDA Loan
You can remove a borrower for any reason with a USDA Streamlined refinance. Unlike other streamline programs, you need to re-verify income and credit if you plan to remove a borrower.
However, you can remove a deceased borrower with the no-income-verification “Streamlined-Assist” USDA refinance.
Those with adequate equity (20% or more) can refinance into a conventional loan to remove USDA monthly mortgage insurance.
Start Your Borrower-Removal Refinance
Life happens, and sometimes you need to remove a co-borrower from your mortgage.
Luckily, you have options. Start your refinance to see if you can become the sole name on your loan.
