How do you remove a co-signer from a mortgage? Refinancing into your own name is one option. But even if refinancing isn’t possible, there may be ways to protect your co-signer’s ability to qualify for another mortgage.
Having someone co-sign your mortgage can make homeownership possible when you don’t have enough qualifying income on your own.
Often, that person is a parent helping an adult child purchase their first home. But a co-signer or non-occupant co-borrower can also be another eligible family member or individual, depending on the mortgage program.
Their assistance can make an enormous difference. However, there’s an old saying: “No good deed goes unpunished.” That’s exactly what we want to avoid.
What happens when the person who helped you qualify for your mortgage now wants to purchase another home, refinance, or build their dream home? Will your mortgage prevent them from qualifying?
Fortunately, there are three potential strategies:
- Refinance the mortgage into your name alone.
- Use boarder income from renting a room to help qualify for a refinance.
- Exclude the co-signed mortgage payment from your co-signer’s debt-to-income ratio when they apply for another mortgage.
Understanding these options before a problem arises can help protect everyone involved.
What Is a Mortgage Co-Signer?
A mortgage co-signer is someone who agrees to share legal responsibility for repaying a home loan, even though they may not live in or own the property.
Mortgage underwriting guidelines distinguish between a co-signer and a non-occupant co-borrower. Under Fannie Mae guidelines, a co-signer signs the mortgage note but does not have an ownership interest in the property. A non-occupant co-borrower also signs the note but may or may not have an ownership interest.
For purposes of this article, we’ll use co-signer as the general term for someone who helps another borrower qualify by accepting responsibility for the mortgage.
The important point is this: Even if the co-signer never makes a mortgage payment, they remain legally responsible for the debt.
That obligation can affect their credit and ability to obtain future financing.
We’ll explore these distinctions, including who can co-sign and how the process works under different mortgage programs, in our companion article, What Is a Mortgage Co-Signer and How Does It Work?
Option 1: Refinance the Mortgage Into Your Name Alone
Refinancing is generally the most straightforward way to remove a co-signer from a mortgage.
When you refinance, the new mortgage pays off the existing loan. If you qualify for the new mortgage independently, your co-signer no longer needs to be obligated on the new loan.
For example, imagine a first-time homebuyer whose parents helped them qualify for a $350,000 mortgage. At the time of purchase, the buyer’s income wasn’t sufficient to qualify independently.
A year or two later, the buyer receives a salary increase and can now qualify without the parents’ income.
Depending on the buyer’s financial circumstances, an FHA or conventional refinance may allow the existing mortgage to be paid off and replaced with a new mortgage in the buyer’s name alone.
What Determines Whether You Can Refinance?
Several factors influence refinance eligibility:
- Income: You must have sufficient qualifying income to support the mortgage payment and your other financial obligations.
- Credit: Your credit history and score must meet the requirements of the new loan program.
- Interest rates: The interest rate available when you refinance will affect your monthly payment and qualification.
- Home equity: The property must meet the applicable loan-to-value requirements.
- Loan program: FHA, Fannie Mae, and Freddie Mac have different underwriting and refinance eligibility requirements.
Can You Remove a Co-Signer After One Year?
Potentially, yes. There is no universal rule requiring a co-signer to remain on a mortgage for several years before refinancing.
However, applicable seasoning requirements, credit qualifications, property values, and lender guidelines must be satisfied.
Refinancing also involves closing costs, and your new interest rate may be higher or lower than the original rate.
The objective should be to remove the co-signer when the borrower can qualify independently and the transaction makes financial sense.
Option 2: Refinance Using Income From Renting a Room
What happens if your salary has increased but you still don’t have enough income to qualify for a refinance?
There may be another solution. Certain mortgage programs permit income from someone renting a room in your primary residence to be included in your qualifying income. This is called boarder income.
Not every mortgage program permits boarder income, and the documentation requirements are specific.
Can You Use Boarder Income to Qualify for an FHA Refinance?
Yes. FHA permits eligible boarder income to be considered when qualifying for certain mortgage refinances.
Under FHA Handbook 4000.1, the general requirements include:
- A documented 12-month history of receiving boarder income.
- Rental payments received during at least 9 of the most recent 12 months.
- Evidence that the income is currently being received.
- Documentation of rental payments through acceptable financial records.
- Boarder income cannot exceed 30% of the borrower’s total qualifying effective income.
The lender must calculate the eligible income according to FHA’s requirements, including the applicable 12-month averaging provisions.
Can You Use Boarder Income on a Conventional Refinance?
Yes, but only under certain programs or exceptions.
Standard conventional refinances generally do not accept ordinary boarder income. However, Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs permit eligible boarder income.
Fannie Mae HomeReady
Fannie Mae’s HomeReady mortgage program permits qualifying boarder income on eligible limited cash-out refinances.
Generally, the requirements include:
- Shared residency: The boarder must have lived with the borrower for the previous 12 months.
- Payment history: Rental payments must be documented for at least 9 of the most recent 12 months.
- Income calculation: Qualifying income is based on the applicable 12-month averaging requirements.
- Income limitation: Boarder income cannot exceed 30% of total qualifying income.
- Boarder eligibility: The boarder cannot have an ownership interest in the property or be obligated on the mortgage.
HomeReady generally limits qualifying borrower income to 80% of the area median income (AMI) for the property’s location.
Freddie Mac Home Possible
Freddie Mac’s Home Possible mortgage program also permits eligible boarder income, including on qualifying no-cash-out refinances.
Generally, the requirements include:
- Shared residency: The boarder must have lived with the borrower for at least 12 months.
- Payment history: Rental payments must be documented for at least 9 of the most recent 12 months.
- Income calculation: If fewer than 12 monthly payments are documented, the qualifying income must be averaged over 12 months.
- Income limitation: Boarder income cannot exceed 30% of total qualifying income.
- Boarder eligibility: The boarder cannot be obligated on the mortgage, have an ownership interest in the property, or be the borrower’s spouse or domestic partner.
- Documentation: A signed borrower statement confirming the income source, shared residency history, and expectation that the boarder will continue living in the home is required.
Home Possible generally limits qualifying borrower income to 80% of the area median income (AMI).
Why Could FHA Be Particularly Important?
Consider a homeowner whose salary increases enough to exceed the income limits for HomeReady or Home Possible but not enough to qualify for a standard conventional refinance.
If the borrower also receives eligible room rental income, FHA may provide another refinancing option.
This is why it’s important to compare mortgage programs rather than assume one solution fits every borrower.
How Should You Document Boarder Income?
If you anticipate needing room rental income to qualify for a future refinance, start documenting the arrangement as early as possible.
We recommend:
- Establishing a legitimate written rental agreement.
- Receiving rental payments electronically or by check.
- Avoiding undocumented cash payments.
- Maintaining bank records showing actual receipt of the rental income.
- Keeping documentation demonstrating that the boarder resides in the home.
- Maintaining a consistent, documented payment history.
A rental agreement alone is not enough. Lenders must verify the income and determine whether it satisfies the applicable mortgage program’s requirements.
Planning ahead is essential. You generally cannot create 12 months of rental history immediately before applying for a refinance.
Option 3: Exclude the Co-Signed Mortgage Payment From Your Co-Signer’s DTI
This third option is one many homeowners and co-signers don’t realize exists.
Under certain circumstances, a co-signed mortgage payment can be excluded from the co-signer’s debt-to-income ratio when they apply for another mortgage, even though they remain legally responsible for the original loan.
This can be particularly valuable when parents who helped their child purchase a home subsequently want to purchase, refinance, or build a home of their own.
How Can Excluding a Mortgage Payment Make a Difference?
Mortgage lenders evaluate a borrower’s debt-to-income ratio (DTI), which compares qualifying monthly debt payments to gross monthly income.
Let’s consider an example.
A couple earns $10,000 per month and wants to build a new home.
Their monthly obligations include:
- Other monthly debt payments: $1,000
- Proposed new mortgage payment: $3,000
- Mortgage they co-signed for their child: $2,000
If the lender must include all three obligations, their DTI is 60%.
If the $2,000 co-signed mortgage payment qualifies for exclusion, their DTI drops to 40%.
That difference could significantly affect their ability to qualify for financing.
These figures are illustrative and do not guarantee mortgage approval.
Can Fannie Mae Exclude a Co-Signed Mortgage Payment?
Yes. Fannie Mae permits certain mortgage obligations paid by another party to be excluded from the borrower’s debt-to-income ratio.
Under Fannie Mae Selling Guide B3-6-05, the general requirements include:
- The person making the mortgage payments must also be obligated on the mortgage.
- The lender must document the most recent 12 months of payments made by that person.
- There must be no delinquencies during that period.
- The borrower seeking the exclusion cannot be using rental income from that property to qualify.
When these requirements are satisfied, the lender may exclude the applicable mortgage payment, including principal, interest, taxes, insurance, and applicable association dues.
Can Freddie Mac Exclude a Co-Signed Mortgage Payment?
Yes. Freddie Mac also provides for the exclusion of certain mortgage obligations when another party is responsible for making the payments.
Under the Freddie Mac Seller/Servicer Guide, the lender must establish that the obligation meets Freddie Mac’s requirements for excluding a contingent liability.
For a mortgage obligation, this generally involves documenting that another obligated party has made the payments for the required period, typically 12 months, without delinquency.
The lender must verify the applicable requirements and supporting documentation.
Can FHA Exclude a Co-Signed Mortgage Payment?
Yes. FHA permits certain co-signed obligations to be excluded from the borrower’s qualifying debt-to-income ratio.
Under FHA Handbook 4000.1, the lender generally must document that the other party has made regular, timely payments during the previous 12 months.
The obligation must meet FHA’s contingent-liability requirements, and the lender must obtain acceptable supporting documentation.
Can VA Exclude a Co-Signed Mortgage Payment?
Yes. VA financing also provides for excluding certain co-signed obligations from the borrower’s debt-to-income calculation.
Under the VA Lenders Handbook, a lender may consider excluding the obligation when:
- There is evidence that another party is making the payments.
- The obligation is current.
- There is no reason to believe the borrower will need to assume responsibility for repayment.
VA’s requirements differ from conventional and FHA financing, and the lender must evaluate the circumstances and documentation.
Does Excluding the Payment Remove the Co-Signer From the Mortgage?
No. This is an extremely important distinction.
Excluding a mortgage payment from a debt-to-income calculation does not remove the co-signer from the mortgage.
The co-signer remains legally responsible for the debt.
If the primary borrower stops making payments, the lender may still require the co-signer to repay the mortgage.
The obligation may also continue appearing on the co-signer’s credit report.
Option 3 may help preserve the co-signer’s borrowing capacity, but it does not provide the same protection as refinancing the mortgage into the primary borrower’s name alone.
Why Is Documenting the Mortgage Payments So Important?
If you’re the primary borrower, we strongly recommend making every mortgage payment directly from your own bank account.
Maintain a complete and consistent payment history.
If your co-signer applies for another mortgage in the future, those records may help establish that you’ve been responsible for making the payments.
This is particularly important when the new mortgage program requires 12 months of documented payment history.
Planning ahead can make a significant difference in your co-signer’s ability to qualify for future financing.
The Most Important Advice We Give Mortgage Co-Signers
When someone agrees to co-sign a mortgage, they’re making a significant financial commitment to help another person become a homeowner.
Often, it’s a parent helping an adult child purchase their first home.
That assistance can be life-changing. But it also comes with responsibilities that shouldn’t be overlooked.
Our most important advice is simple: If you ever think you might have difficulty making your mortgage payment, tell your co-signer immediately.
Don’t wait until the payment is late. And don’t assume you can catch up next month without anyone knowing.
Have the Difficult Conversation Before There’s a Problem
We understand that telling a parent or family member you’re having financial difficulties can be uncomfortable.
But remember why they agreed to co-sign in the first place. They wanted to help you succeed.
A missed mortgage payment can damage both your credit and your co-signer’s credit. It can also interfere with their ability to purchase another home, refinance, or obtain other financing.
Having an honest conversation before a payment becomes delinquent gives everyone more time to consider their options.
Those options might include temporary financial assistance, contacting the mortgage servicer to discuss available assistance programs, or exploring whether refinancing is feasible.
Make Removing the Co-Signer Part of Your Long-Term Plan
If someone helped you qualify for your mortgage, consider establishing a plan to eventually release them from that responsibility.
That doesn’t mean you need to refinance immediately or accept an unfavorable interest rate.
It means periodically reviewing your financial position, including:
- Changes in your income and employment.
- Improvements in your credit.
- Changes in your home’s value and equity.
- Available refinance programs.
- Whether documented boarder income could help you qualify independently.
Even if refinancing isn’t possible today, reviewing your options periodically can help you identify when removing your co-signer becomes financially practical. Until then, maintaining an excellent mortgage payment history can help protect your co-signer’s credit and future borrowing opportunities.
Frequently Asked Questions About Mortgage Co-Signers
Can You Remove a Co-Signer From a Mortgage Without Refinancing?
Sometimes, but it depends on the mortgage and the lender or servicer. A formal release of liability may be available in limited circumstances, but it is not automatic. Simply removing someone’s name from the property deed does not release them from responsibility for the mortgage.
If the goal is to eliminate the co-signer’s legal obligation, refinancing into the remaining borrower’s name is generally the most practical option.
How Long Does a Co-Signer Have to Stay on a Mortgage?
There is no universal requirement that a co-signer remain on a mortgage for a specific number of years. The co-signer generally remains responsible until the mortgage is paid off, refinanced without them, or they receive an approved release of liability.
If the primary borrower can qualify independently after one year, refinancing may be possible, subject to applicable loan-program and lender requirements.
Can You Remove a Co-Signer if Your Income Has Increased?
Yes, an increase in qualifying income may make it possible to refinance without the co-signer. However, the lender will also evaluate your credit, existing debts, property value, and the terms of the new mortgage.
A higher salary doesn’t automatically guarantee approval.
Can Renting Out a Bedroom Help You Remove a Mortgage Co-Signer?
Potentially. Eligible boarder income may help a borrower qualify for an FHA refinance or certain affordable conventional refinance programs, including Fannie Mae HomeReady and Freddie Mac Home Possible.
These programs have specific requirements concerning shared residency, payment history, documentation, and income limits. Not all conventional mortgage programs permit boarder income.
Can a Co-Signer Qualify for Another Mortgage?
Yes. A co-signer can apply for another mortgage, although the existing co-signed obligation may affect their debt-to-income ratio.
Depending on the new mortgage program, the lender may be able to exclude the co-signed payment if another obligated party has been making the payments and the applicable documentation requirements are met.
The co-signer remains legally responsible for the original mortgage even if the payment is excluded from their qualifying debt ratio.
Does Removing Someone From the Deed Remove Them From the Mortgage?
No. The deed establishes ownership interests in the property. The mortgage note establishes the obligation to repay the loan. Changing the deed does not, by itself, remove a person’s responsibility for the mortgage.
This distinction is especially important when a non-occupant co-borrower also holds an ownership interest in the home.
What Happens if the Primary Borrower Misses a Mortgage Payment?
A missed mortgage payment can affect both the primary borrower and the co-signer. Because the co-signer is legally responsible for the debt, the lender can pursue repayment from them if the primary borrower fails to pay.
A delinquency may also appear on both parties’ credit reports. If you’re concerned about making a payment, contact your co-signer and mortgage servicer before the situation becomes more serious.
Final Thoughts: A Good Deed Shouldn’t Become a Financial Burden
Helping someone purchase their first home is a generous thing to do. For many families, having a parent or another qualified individual co-sign a mortgage can make homeownership possible years sooner than it otherwise would be.
But circumstances change.
The parent who helped their child purchase a home may eventually want to downsize, refinance, or build a new home of their own. The original mortgage shouldn’t become an unnecessary obstacle to those plans.
As we’ve discussed, there are three potential solutions:
- Refinance the mortgage into the primary borrower’s name alone, removing the co-signer’s obligation.
- Use eligible boarder income to help the primary borrower qualify for a refinance under certain FHA or affordable conventional mortgage programs.
- Exclude the co-signed mortgage payment from the co-signer’s debt-to-income ratio, when permitted by the new mortgage program, even though the legal obligation remains.
Each approach serves a different purpose, and the best solution depends on the borrower’s circumstances and the applicable underwriting guidelines. At Millennial Home Loans, we help borrowers evaluate mortgage options and understand how different loan programs may apply to their situation.
If you have a mortgage co-signer you’d like to remove, or you’ve co-signed for someone and are concerned about qualifying for your next home, we’re happy to help you explore your options.
Mortgage approval and eligibility are subject to applicable program guidelines, underwriting requirements, and lender approval. This article is for general educational purposes and does not constitute a commitment to lend.
Table of Contents
