Removing a borrower with an FHA streamline refinance

Sometimes, a signatory to an existing mortgage agreement needs to exit the arrangement. Can you remove a borrower on an FHA streamline refinance? And what about other types of refis and different possible tactics?

It’s easy to imagine circumstances where you wish to drop a borrower from your mortgage. You may have been through a divorce or the breakup of a long-term romantic relationship. Or perhaps the friend or sibling with whom you bought the home has moved on. Worse, a signatory may have died.

So, Can You Remove a Borrower On an FHA Streamline?

Good news: you can remove a borrower using an FHA streamline refi in cases of divorce, legal separation, or death of a borrower.

However, you may have to clear some hurdles before your lender removes someone from your mortgage agreement.

Read on to discover what those hurdles are and ways to jump them.

Highlights

• You can remove a borrower from an FHA streamline refinance in cases of divorce, legal separation, or death.
• Re-verification of income and credit is typically required unless you meet specific conditions like having a final divorce decree or proving six months of solo payments.
• Adding a borrower during an FHA streamline refinance is usually straightforward and may not require a credit check.
• Consider FHA cash-out loans, conventional mortgages, or loan modifications if you need to buy out a co-borrower’s share.

Why the Lender Needs Re-Approval (Sometimes)

A standard FHA streamline refinance does not require income re-verification if both borrowers remain on the loan.

The lender assumes nothing has changed since the last FHA loan approval.

But removing a borrower indicates an obvious change with the loan. The lender now needs to ensure the remaining borrower can comfortably afford to make monthly payments without the help of the other borrower. And, naturally, you’ll need the other borrower’s consent to remove him or her from the mortgage.

The FHA handbook says, “The lender must provide evidence that the remaining borrowers have an acceptable credit history and ability to make payments.” And the lender will look to you to provide that proof.

So, it will likely wish to verify your employment history, check your debt-to-income (DTI) ratio,  and run your credit as part of that process.

In other words, you’ll likely have to virtually requalify for the mortgage. The good news is that the lender may agree to skip the appraisal. 

When You May Not Need Re-Verification

The FHA’s rules are slightly different when you have a final divorce decree or a co-borrower passed away. 

If you’ve made at least six months of payments on your own, you may not need to fully requalify for the FHA streamline refinance.

But you will have to show that:

1. The mortgage is paid up to date
2. The last six months’ payments were made by you personally, not partly by the other borrower or anyone else. You can use canceled checks or bank statements to do that

Naturally, you’ll also have to prove that you have a legal claim to the home. That could be a court order from the divorce court. Or, after a death, it might be a will or other document showing your ownership. Those can stand in for the other borrower’s consent to be dropped from the mortgage agreement.

Adding a Borrower to Your FHA Streamline Application

The re-verification rules above don’t apply if you want to add a borrower during an FHA streamline refinance. That’s easy because it means the lender has someone else contributing to and guaranteeing the loan. The added individual doesn’t even need a credit check (at least, according to FHA rules, but check with your lender, who may have their own rules on this).

You can add anyone you wish to the loan as long as they are FHA-eligible.

Alternatives to Borrower Removal

Streamline refis can’t be cash-out refinances. And that can be a critical point after a divorce or when a co-buyer wants out. You can’t use this type of refinance to get the money needed to buy out the other person’s ownership share.

To do that, you could apply for an FHA cash-out loan or a conventional cash-out mortgage. But you should also explore home equity loans and HELOCs, which can be less costly if a refinance involves taking on a higher mortgage rate. 

Another way to remove a borrower soon after a divorce is a loan modification. One of the principal conditions for one of these is that you face financial hardship. Most lenders recognize a recent divorce as causing such hardship.

With a loan modification, a lender might extend your mortgage’s term or grant you an interest rate reduction, either of which should leave you with a lower monthly payment. And you can lose the second borrower when you modify, again, with that person’s consent.

Conclusion and Next Steps

Does all this sound offputting and complicated? Don’t let that deter you. 

There are typically over 600,000 divorces annually in the U.S. and more than 3 million deaths. Even if only a small proportion of those have FHA loans, these refis are commonplace. And lenders will be ready to hold your hand throughout the entire process. 

So, the answer to our original question, “Can you remove a borrower on an FHA streamline refinance?” is yes. And you may find it easier than it sounds.