The process can be done, but it won’t be easy. That’s true for the person who signed the loan as a primary borrower, as well as for co-signers who helped them get approved; and until the name is removed and the mortgage is changed on paper (or paid off entirely), all parties who signed the loan are still responsible for payments, and that debt can reduce their chances of getting other loans.
The Challenge
Lenders are not eager to take anybody’s name off of a home loan. When they first approved the loan, it was based on each person’s credit score, and two sources of income. In fact, the joint income of both borrowers was a major factor in their decision to offer you a home loan. In most cases, each person who signed the loan is 100% responsible for the debt—it’s not 50/50 on a joint loan. If one borrower can’t pay for any reason—whether due to hardship with money, or even if one person dies—the other needs to keep up with payments or pay off the loan. If lenders remove a name, they increase their risk, and they give somebody a free “out” from paying back the loan. Lenders are not often willing to take such a risk. Though neither party may like it, lenders see each person who signed the loan as a way to collect. You might think that it’s “our” loan, but banks protect against that idea. For instance, in cases of divorce, there is no more “us,” even on a legal basis, but your loan agreement is not structured that way. Even if a divorce contract says that your ex is responsible for the debt, lenders can still collect from each person who applied.
How to Remove a Name
There are a few ways to take someone’s name off a loan. Expect the process to take some time and a great deal of paperwork, but if you can follow each step one-by-one, you’ll soon be able to put the loan behind you.
Ask Your Lender
Start by asking your current lender about changing the loan. You won’t get it all done in one phone call, but if you ask the right questions, you’ll be able to tell whether you can keep the loan as it is currently written, but with one less borrower. If so, anyone whose names remain will need to re-qualify for the loan on their own. That means if you want to keep the loan without your partner, you’ll need enough income and a high enough credit score to convince the bank that you can make payments each month, without fail, until the loan is paid off. Also, you may need to go through an application process like the one when you first obtained the loan. If your lender approves your request, they may release the other person from any liability for the debt (often used in cases of divorce).
Refinance the Loan
If your current lender doesn’t help you, try refinancing the loan. This simply means you apply for a new loan and use that loan to pay off the old debt. The person who signs the new loan should apply individually, and they need enough income and high enough credit scores to qualify for the loan. Other lenders might be more willing to approve a new loan, and you might be able to get help from programs like FHA loans (which have more relaxed standards when it comes to the size of your down payment and credit scores).
If You’re Underwater
Refinancing may be off the table when your home is worth less than you owe—or if you have don’t have enough equity in the home. Most lenders require that you fall within certain loan-to-value ratios. Simply put, this is a way to measure how much is owed on a home, compared to its market value; or in other words, how much cash the bank stands to lose if you default. You won’t meet those guidelines unless you write a big check at closing. The good news is there are government programs in place that might help you get a new loan. Before you go through the whole process, check first to see whether you can get the loan refinanced under the name you want.
Assumption
You might be able to transfer a mortgage to another person, especially if that person is already planning to buy the house. Some mortgages are assumable—meaning simply, someone else can assume the loan; however, most are not. If you’ve borrowed through the FHA or VA, you may be able to transfer your loan that way. Still, it’s worth asking, no matter where you borrowed
Sell the House
If you don’t have any luck with the methods above, you might need to sell the house and use the sales proceeds to pay off the loan. Selling a house that carries a lot of debt with it can be tough, and the struggle can disrupt you and your loved ones. Review your options with care and get help from local real estate agents before you go that route.
Costs
All of the options above involve fees, so look closely at all of your options before choosing, and decide ahead of time who will pay the fees. Even if you choose to sell the house, and you make some money on the sale, real estate agent fees and other costs will count against your profit. Of the options listed, a release of liability or a loan assumption are the cheapest, because they avoid the closing costs that come with refinancing.
Process for Co-Signers
All of the above is also true for co-signers on a mortgage. As a co-signer, you’re 100% responsible for the loan, and lenders don’t want to let you off the hook. Talk to the person you first signed the loan with about their options, and don’t forget that their future is tied to yours. With some loans (e.g., student loans) it is easier to get a co-signer off the loan after you have made a set number of on-time payments. Most home loans do not offer the same features.
Quitclaim Deeds
With a quitclaim deed, the owner passes the title of a home to someone else, for legal or other reasons. This kind of deed does not remove someone’s name from a mortgage; all rights of ownership are transferred, but loan contracts remain unchanged, and the person who first signed the loan still owes that debt. As a result, a quitclaim deed can leave a borrower worse off than they were before—they owe money on a house, but they no longer have any claim to it as its owner.
