What’s the plan when your spouse or co-borrower needs to come off the mortgage? Will you refinance, keep a modified version of the loan, or sell the home to pay the loan off?
Here’s a quick Q&A to explore the possibilities.
Question: We’re Separating, But Can We Just Agree to Keep Paying This Mortgage?
Answer: You and your ex-partner — or you and a co-borrower who’s getting off a mortgage they co-signed — might agree that one person alone will keep paying the mortgage. Great. But get the mortgage placed solely in the remaining owner’s name.
Can’t one person or both just keep paying, and skip all the bureaucratic hassles? That kind of agreement is problematic, even if it’s well-meaning. Both credit profiles will be impacted by the way one handles debt.
Plus, as long as the person who is not living in the home carries a load of mortgage debt, it will be hard for that person to qualify for other loans. And what if the person who keeps the home runs into financial stress and delays payments without the lender’s permission? The other person’s credit will be tied up in the problem.
Dented credit can be restored. But the co-borrower has to get out from under the mortgage to make it happen.
Q. My Co-Borrower Will Be Coming Off the Loan as We Agreed. Does the Loan Need to Be Refinanced?
A. If your co-borrower agrees with your future plan for sole ownership, you’ve likely expected to refinance the home. To qualify on your own, return to your mortgage specialist for a new loan approval process. You’ll be demonstrating that your credit profile is in good shape, and that you’re are making enough money to handle the loan for at least three years on.
You’ll likely be starting the mortgage at the beginning again, from year one. You’ll have to repeat the home appraisal process and all the steps you went through in your original loan. But this time, you’re not new to the mortgage process. You’ll have the record of a faithfully paid mortgage to show the lender.
Bonus: Refinancing your home when mortgage interest rates have dipped gives the new sole homeowner enviably low monthly payments. In fact, low interest rates can make a mortgage affordable for a sole homeowner.
Pro tip: You could ask about refinancing into a shorter term of years so you’re not looking at another 30-year mortgage. But the shorter the term of years, the higher the monthly payments. It could be much less stressful to get another 30-year loan, and just pay down the principal faster as and when you can.
Q. So, the Refinancing Needs a Full-Blown Approval Process?
A. Yes. This is a new loan (whether it’s with same lender or another one). Now, the lender is considering whether the sole borrower can handle the loan. The new sole borrower needs a strong credit profile and dependable income. Proof will be required in the form of W2s and paystubs, and spousal or child support can be also counted. The new sole borrower needs to prepare for a new set of closing costs.
There are tradeoffs you can make, like paying slightly higher interest rates (which be tax-deductible) to reduce your closing costs.
If you have a government-backed home loan, you may be able to bypass some requirements, like a new home appraisal. The USDA Streamline Refinance allows the removal of one co-borrower from the mortgage if the lender approves the other individually for the loan. With the FHA Streamline Refinance, a new sole borrower who has paid the mortgage for six months may simply be able to take over the loan. A VA loan simply allows removal of a co-borrower if the new sole borrower is the veteran.
Whether you have a government-backed or conventional loan, speak with your mortgage specialist or loan officer as early as possible. There may be further options and requirements in your situation.
Q. Aren’t There Other Ways To Avoid Refinancing?
A. It may be possible to get a loan assumption or loan modification.
- Assumption. Government-backed loans (and a few conventional loans) are assumable mortgages. This means no closing costs when handing the mortgage over to a new sole borrower. The lender must agree that the new sole borrower is qualified to take over the mortgage alone. The sole borrower should obtain a release of liability, just in case the other partner runs into trouble paying the debt off.
- Modification. Loan modification is another method of changing the mortgage without refinancing.
Call your loan servicer to ask whether you can take a name off the mortgage through these methods. For conventional loans, these possibilities are long shots. From the lender’s point of view, multiple borrowers are multiple people to hit up for payments. Understandably, they hesitate to let anyone off the hook. But you really don’t know what options the lender could offer until you call and ask about your loan and the way your circumstances have changed.
☛ How does the loan servicer interact with your mortgage? See On Stage and Behind the Scenes in a Mortgage to learn more about the various loan professionals, including the loan servicer.
Q. What if the Sole Borrower Gets Turned Down? Will We Have to Sell?
A. It depends. Can the applicant get a new co-borrower?
Selling may be the way ahead for separating partners if the party who wants to stay cannot qualify for the loan. At the end of the day, many people have a hard time single-handedly affording a mortgage that they obtained on the basis of two incomes. If you’re like most people, you’ll need to sell. Thus, divorce courts often direct the sale of the couple’s home. Then, the mortgage lender can be satisfied, and the partners can separate their finances in the most practical, final way.
There may be a silver lining. At the time of publication, there’s a hot real estate market in most areas of the United States. This is good for home sale prices, terms buyers will accept, and the speed of most sales.
Word to the wise: Are you thinking of helping your child, parent, sibling, significant other or friend…by being a temporary co-borrower? Be sure the primary borrower can and will pay the mortgage. If not, the house could need to be sold to pay the debt. Meanwhile, you have taken on financial and legal risks.
Q. What About the Deed?
A. If you sell, of course, the borrowers will transfer the deed to the home’s new owner. But if you refinance or use a similar method to take a co-borrower off the mortgage, that action has no effect on the deed. In most situations, when a co-borrower comes off the mortgage, that person also signs over the title to the home to the established the other party as the new sole homeowner.
One way to sign over the title is to create a quitclaim deed. By quitclaiming, one former partner relinquishes all rights to the home to the other. Have this document notarized and recorded, following the rules of the property’s county recorder of deeds.
☛ Many homes are jointly owned by couples. If a couple splits up, what will happen to their jointly held title? Find out what you should know in our guide to Deeds and Divorce.
Quitclaiming the house does not remove you from the mortgage. Taking a co-owner off a deed versus removing a co-borrower from a mortgage are two separate tasks. If you quitclaim a property without getting off the mortgage first, the lender can come after you for the debt, and you’ll have no rights to the house.
Life-Changing Decisions Should Be Professionally Guided
We offer this article for our readers’ general awareness. It is not intended as, and should not be taken to be, legal or financial advice.
Retrieve preliminary information with a call to the mortgage servicer or your own mortgage specialist. This is often the best way to learn about your options when new situations will change your relationship to a mortgage. Additionally, your tax preparer should be asked to go over your decision in advance with you, to lay out the tax impact. In short, life-changing decisions should be guided by the knowledge of licensed professionals in the state where the home exists.
As you now know, taking someone off a mortgage is no easy feat. But there are ways to get it done.
Pete Gerardo for The Mortgage Reports: How to Remove a Name From a Mortgage — With or Without Refinancing (published by Full Beaker, Inc. on Dec. 11, 2020).
Justin Pritchard with Thomas J. Brock for The Balance: Tips for Getting a Name Off a Mortgage: Options for Changing Borrowers (updated May 18, 2021).
Carey Chesney for RocketMortgage.com: How to Remove a Name From a Mortgage (May 16, 2021).
Photo credits: Mikhail Nilov, via Pexels.