Co-borrower on a loan: who is it, how is it different from a guarantor, rights

For many Russian citizens, a mortgaged apartment is the main purchase in life. Today we will answer you such frequently asked questions as: is it possible to bankrupt a co-borrower on a mortgage, what to do if a co-borrower on a mortgage goes bankrupt, what will happen to the mortgage and general acquired property in such situations.

Let’s say right away that a co-borrower on a mortgage can go bankrupt! But we’ll tell you below how to do this and what consequences arise. Let's start in order.

Who is a mortgage co-borrower? When the financial capabilities of the main mortgage borrower do not fully meet the lender's requirements, the law provides him with the opportunity to share his obligations with third parties. These are the co-borrowers.

Most often, married couples apply for such bankruptcy, in which one of the spouses is a borrower and the other spouse is a co-borrower. However, in practice there may be more than one co-borrower. There can be up to 4-5 co-borrowers in one mortgage agreement. For example, in addition to the spouse, co-borrowers can be the borrower’s mother or father or both parents, as well as other relatives (brother, sister, children).

If one of the co-borrowers shows signs of insolvency, then the current situation makes all debtors under the mortgage agreement worry. And not in vain.

Today you will learn what you need to be prepared for if a borrower or co-borrower (or one of the co-borrowers) under a mortgage agreement applies to an arbitration court with an application to declare him financially insolvent (bankrupt). Forewarned is forearmed!

First, let's figure out what rights, obligations and responsibilities arise for co-borrowers after signing a mortgage agreement.

Co-borrower - who is it and what is it for?

Co-borrower is a third party in a loan agreement who fulfills obligations under the agreement on an equal basis with the title borrower. A co-borrower is involved in the agreement when required by the lender or applicable law.

The co-borrower has the same rights and obligations as the title borrower. In fact, if under a regular loan agreement funds are issued to one person, then if there is a co-borrower - to two or more persons.

Thus, the bank shares responsibility for the loan

This person is subject to the same requirements as the title borrower. Most often, a co-borrower is involved under contracts with a long validity period, or for significant loan amounts.

The point of attracting a second borrower is that the income of the main client may not meet the requirements of the credit institution. If the obligations under the contract are beyond the capacity of one borrower, a second borrower is involved - this is how the mechanism works.

Pros and cons of a solidarity loan

Let's summarize the advantages of a mortgage

with several borrowers:

the conditions are more favorable, the loan amount is larger. Since two or more co-borrowers increase the reliability of loan repayment, this is beneficial for banks. A separate benefit for such a mortgage is the opportunity to receive a larger amount, and therefore acquire more spacious living space;
it is easier for multiple co-borrowers to pay the mortgage. If one borrower temporarily faces financial difficulties, then his co-borrower will be able (and obligated!) to provide loan payments with his own funds;
right to tax deductions. Every joint borrower has the right to resort to tax deductions (both for the principal amount and for credit interest) (Article 220, paragraph 1, paragraph 4 of the Tax Code);
maintaining the “civil” status of marriage. A couple who has taken out a mortgage loan on the terms of a joint loan with the distribution of shares in the acquired property does not need to be officially married.

Disadvantages of a co-borrowed mortgage

the status of a joint borrower is not a formality. The bank has every right to demand mortgage payments from the second (and subsequent) co-borrower if the main borrower has stopped making payments. At the same time, it is extremely difficult to independently exit a joint loan transaction with a bank;
difficulties in obtaining a loan “for yourself”. Being a co-borrower on “someone else’s” loan, it is difficult to take out a loan for yourself, since the financial institution will analyze solvency taking into account the co-borrowed loan;
You won't be able to become a co-borrower with a bad credit history. A mortgage bank will refuse to approve a loan if an “optional” co-borrower is involved in the transaction;
the risk of worsening your credit history “out of the blue.” If mortgage debt arises with joint borrowers, it will be reflected in the credit history of all co-borrowers (both “main” and “auxiliary”), even if they have not made payments;
Selling a share to a co-borrower can be difficult. If “co-borrowed” shares were specified in the mortgage agreement and any participant in the credit transaction wants to sell their part of the property, then if the remaining co-borrowers refuse to buy out the share or allow its sale, it will be extremely difficult to come to an agreement with them.

It should also be noted that the share of one common-law spouse in a co-borrowed mortgage will not pass to the second without a corresponding will, since inheritance rights apply only to relatives and spouses who are in a marriage registered by the registry office.

Legal provisions

In accordance with Art. 323 of the Civil Code of the Russian Federation, the co-borrower bears joint liability for the loan. The term “joint and several liability” means that the co-borrower is liable for the obligations together with the borrower.

In the agreement, the co-borrower appears on an equal basis with the borrower. The level of his responsibility can be established in the contract if we are talking about a share, for example, in a mortgaged apartment. Most often, the responsibility of the co-borrower is not clearly expressed.

For the lender, this approach is more convenient: if the borrower fails to fulfill its obligations, it makes demands on the co-borrower to repay the debt.

Consequently, the legislation only indicates that the co-borrower is jointly and severally liable under the agreement, but does not in any way regulate the scope of this very liability. Here the right is always assigned to the credit institution.

The co-borrower is liable for obligations together with the borrower

What are the consequences of the bankruptcy of a co-borrower on a mortgage for the main mortgagor?

Increasingly, our clients come to us with the question of what to do if their co-borrower or one of the co-borrowers on the mortgage has applied to the court to declare him financially insolvent (bankrupt). As the practice of the arbitration court shows, the bankruptcy of a co-borrower creates a number of difficulties for the borrower and not only for him.

The borrower must be prepared for the following:

creditors begin to demand termination of the contract or its early repayment. As mentioned above, for the lender, the bankruptcy of a co-borrower is a deterioration in the conditions for ensuring the repayment of the mortgage loan;
the lack of sufficient funds from the borrower or the second co-borrower to repay the debt of the bankrupt co-borrower gives the creditor the right to put the pledged property up for auction.

Advice from an expert: if a co-borrower shows signs of financial insolvency, the main borrower under the mortgage agreement must immediately apply to the court with an application to replace the co-borrower or withdraw him from the mortgage agreement.

In the event of bankruptcy of a co-borrower under a mortgage agreement, it is advisable to contact the bank with an application to replace him before he applies to the arbitration court with an application to declare him bankrupt. Otherwise, the lender interprets the bankruptcy of the co-borrower as a worsening of the conditions for ensuring the repayment of the mortgage loan, and he has the right to terminate the agreement ahead of schedule.

Do you need to write an application to replace a co-borrower or remove him from the mortgage agreement? Our specialists are ready to help you at any time convenient for you.

Important! If a co-borrower under a mortgage dies, his obligations pass to other co-borrowers or to his heirs. In the event that they enter into an inheritance.

Very often women come to us asking what to do if a co-borrower-spouse goes bankrupt on a mortgage? In such situations, the creditor has the right to demand through the court to foreclose exclusively on the property of the co-borrower spouse. If the total value of the property of the debtor spouse does not pay off the total amount of debt, then jointly acquired property may also be subject to collection. In this case, the share of the debtor spouse is separated from the total amount of jointly acquired property.

As you can see, the bankruptcy of a spouse’s co-borrower on a mortgage will not pass without leaving a mark on your common property.

Call, and our specialists will do everything possible and impossible to protect your interests.

Often in practice both spouses become bankrupt. In this case, they are both liable under the mortgage agreement. Such spouses should remember that such a situation is a stalemate.

What is the difference between a co-borrower and a guarantor?

From the description of the mechanism it is clear that it is very similar to a guarantee under a loan agreement. The guarantor also acts as a third party in the agreement, who is responsible if the borrower fails to fulfill his obligations under the agreement.

The difference is that the guarantor is responsible to the bank instead of the borrower, while the co-borrower is responsible along with the borrower. That is, here it is necessary to pay attention to the words “instead” and “together”. Besides:

The income of the guarantor is not taken into account when calculating the loan amount, but the income of the co-borrower is always taken into account.
The guarantor's liability arises in the event of the borrower's inability to pay, and the co-borrower is responsible for the loan immediately after concluding the loan agreement.
The guarantor does not have any rights to the object acquired using loan funds, and the co-borrower, as a rule, has equal rights with the borrower (unless otherwise provided by the agreement).
For an individual, a legal entity can also be a guarantor, and only an individual can be a co-borrower.
The guarantor is involved in the agreement on a voluntary basis, and the co-borrower in some cases becomes one in accordance with the requirements of the law.

The difference, as you can see, is insignificant, but it is there. Both are bound by certain obligations. But the co-borrower always has an order of magnitude more rights under the agreement.

Influence the bank's decision to get a mortgage

To increase your chances of getting a mortgage for a one-person household, collect all statements and income certificates. Try to confirm your additional income with bank and card statements. If you have a deposit, be sure to include this information in your application. Banks are loyal to customers who keep money in banks.

Get a statement from the BKI in advance and make sure that you have a positive credit rating. If you have other credit obligations, try to pay off all debts in advance. Managers will check your credit load, but it is best when you have no other debts to banks. If the bank requires a down payment of 20%, try to put down 30% or even 40% of the property price. Thanks to this, you will reduce the total loan amount and overpay less on interest.

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Who is a co-borrower in a mortgage?

For consumer loans, the institution of co-borrowers is observed much less frequently than for mortgage programs. This is due to the fact that cash loans today are issued mostly on a simplified basis, with minimal collateral.

Under mortgage programs, banks may require a co-borrower. In some cases this is required by applicable law. For example, if a mortgage is issued by a person who is officially married, then his spouse is automatically called upon as a co-borrower.

In this case, the latter has the right to refuse to participate in the contract. This is done by concluding a marriage contract (agreement) in accordance with Art. 40 IC RF. A co-borrower-spouse is a vivid example of when a person acquires rights to living space by force of law.

That is, the co-borrower, after drawing up a loan agreement, may not acquire any rights to the object, unless there is an agreement with the borrower, or the law does not directly indicate this. If a mortgage is issued by strangers, and one of them is a co-borrower, then without a separate agreement, the apartment will remain the property of the borrower.

In this case, the spouse has the right to refuse to sign the agreement

On the other hand, by assuming potential obligations, the co-borrower in each case seeks benefit for himself personally. No one wants to burden themselves with a bank loan just like that. Therefore, we can say with confidence that the co-borrower in almost all cases receives the rights to the mortgaged property.

What will happen to the mortgaged property if the borrower goes bankrupt?

According to statistics from the Central Bank of the Russian Federation, more than 1/3 of debtors under mortgage agreements fail to meet their obligations. Life situations can be so unpredictable and unexpected that no mortgage debtor can 100% guarantee their fulfillment.

The bankruptcy of a mortgage borrower, as well as the bankruptcy of one of the mortgage co-borrowers, cannot but affect the collateral real estate. Financial insolvency deprives debtors of their right to mortgage housing.

Important to remember! If the mortgage borrower has already been declared bankrupt by a court decision, then he is obliged to notify the bank about this before signing the mortgage agreement. Otherwise, concealment of such a fact may serve as grounds for early termination of the contract.

Numerous judicial practice has shown that in case of improper fulfillment of the law and obligations on the part of the borrower under the mortgage agreement, the bank can foreclose on the collateral property, even if it:

is the debtor’s only home;
registered for minor children;
designed for disabled people.

This approach to mortgaged real estate is due to the fact that it does not belong to the debtor until it is fully redeemed. For the duration of the mortgage agreement, the subject of the agreement - real estate - is pledged to the bank and is the guarantor of the return of funds under the agreement.

If the co-borrower(s) or guarantor(s) pay the borrower's obligations under the mortgage agreement, then the bank does not have the right to terminate the agreement and put the mortgaged property up for auction.

In case of financial insolvency of the main debtor, the obligations under the mortgage agreement are automatically transferred to the guarantor. However, by this time the guarantor may also be unable to pay debts for the mortgage borrower. What should a guarantor do in such situations? In this case, the guarantor also has the right to file an application to the arbitration court to declare himself bankrupt.

Important! The bankruptcy of the borrower and guarantor has its own sequence. At the same time, they cannot apply for bankruptcy.

The guarantor has the right to apply to the arbitration court with a statement of his financial insolvency only after:

the borrower stopped paying the loan;
the bank, based on a court decision, redirected monetary claims for mortgage lending to the guarantor;
bailiffs, in accordance with the law, initiated enforcement proceedings against the guarantor;
the amount of debt, including the remaining debts of the guarantor, is more than 500,000 rubles.
the guarantor has been in arrears for more than 90 days;
the total amount of income and property of the guarantor in monetary terms does not satisfy the requirements of all creditors.

Thus, the law gives the guarantor the right to apply to the court to declare himself bankrupt if the guarantor’s position meets all of the above requirements. True, sometimes you can file for bankruptcy even when the debts have not reached the amount of 500 thousand rubles, but when a person clearly understands that he cannot pay them. For example, he lost his job and hasn’t been able to find it for a couple of months, so he has nothing to pay him with.

If you find yourself in such a situation, contact our specialists for legal support. They will help you correct the situation with minimal losses.

The bankrupt co-borrower is sinking worse than a rock

The bankruptcy of a co-borrower on a mortgage threatens to leave the family homeless. Because a co-borrower is involved when the borrower’s income does not allow him to “delay” the loan payments himself. Often, the bankruptcy of a co-borrower is followed by recognition of the financial insolvency of the main borrower.

Documents presented by the co-borrower

The conclusion that the co-borrower on the loan is considered as a second borrower is unmistakable. Therefore, each co-borrower involved in the agreement is required to provide documents to the bank.

The income of the second borrower is key here. It is involved in order to reduce the credit burden of the main client. Without income verification, attracting a co-borrower will have no logical basis. The following documents will be required:

Passport of a citizen of the Russian Federation.
Receipt 2-NDFL or any other document showing the official income of a citizen.

Additional documents may be included in the package. Each bank has its own rules in this regard. But solvency is checked in every case, without exception.

Please indicate all additional family income in your application.

The bank is not a tax office, so if you have additional income, be sure to indicate this in the application form. Managers will not share information about your additional income, but you will increase the chances of your application being approved. For example, you take a part-time job home and keep all the profits for yourself. You don’t report to the tax office, so you’re afraid to reflect this information on the application form. Bank managers will not contact the tax office, but will mark this information as additional income. Documentary proof of additional income is not required.

Read the article “Nothing to pay for a mortgage: how to get out of the situation?”

Requirements for a co-borrower

The scope of requirements may be completely similar to those presented to the borrower. Banks are interested in cooperation only with reliable clients. In this regard, the following requirements are put forward for the co-borrower:

Availability of official income is documented.
No third-party credit obligations - a small credit load is allowed.
Positive credit history.
Age that meets the requirements of the credit institution.
Permanent registration in the same region as the title borrower.

If these requirements are met, the bank will agree to attract a co-borrower. In this case, the loan amount will be increased and the terms of the agreement will be improved. Therefore, attracting a co-borrower is always considered as an option that improves the position of the main borrower.

These requirements also apply to cases where a co-borrower becomes one by force of law. If a mortgage is issued during a legal marriage, and one of the spouses does not meet the basic requirements of the bank, then the conclusion of the agreement may be refused.

In this case, the loan amount will be increased and the terms of the agreement will be improved.

When do you need a co-borrower?

After a potential borrower applies for a mortgage loan to a banking organization, credit department specialists will begin to carefully study his credit history, income level and estimated expenses, as well as assess other risks that threaten solvency.

Accordingly, the more solvent solidary borrowers a loan applicant is able to connect to a mortgage agreement, the less likely the risk of non-repayment of the loaned amount and the more favorable conditions the bank will agree to offer the client. According to Article 322 of the Civil Code, the number of co-borrowers (debtors under a loan obligation) is not limited.

How to stop being a co-borrower

Termination of a co-borrower’s obligations is a rather problematic process when making changes to an existing loan agreement. Banks, as a rule, do their best to prevent such a change. The reason for this is a decrease in the level of solvency of the main borrower, whose credit load is increasing.

The obligations of the co-borrower terminate simultaneously with the termination of the loan agreement. This is the most painless option for all parties to the contract. In other cases, such changes are possible only with the approval of the credit institution, which in 99% of cases refuses to exclude the co-borrower from the agreement. The latter has several options:

Prove your insolvency by initiating bankruptcy proceedings for an individual.
Agree with the borrower and the bank to change the co-borrower under the agreement.
Separate your obligations into a separate loan agreement.
Resolve the issue through the court.
Repay a certain share of obligations, which is calculated by the bank in relation to the co-borrower in the normal performance of obligations.

In such circumstances, the lender has one important tool left: if the borrowers fail to fulfill their loan obligations, or if the terms of the agreement are violated, they have the right to declare its early termination. And here the standard rules for cooperation between credit institutions and individuals apply.

How to remove a co-borrower from a mortgage

If you are not sure whether the co-borrower will be given a loan on the mortgage, you should be concerned about exiting the deal. However, you cannot simply refuse to fulfill your obligations to the bank. In this case, there is a separate procedure for revising the terms of the loan agreement.

Recommended article: How to get a tax deduction for renovating an apartment or house

How to remove a co-borrower from a mortgage

Discuss your wishes with the title borrower. It will not be possible to withdraw from the loan without his consent. Explain that you doubt whether they will give you a mortgage if you are a co-borrower.
Check with the bank whether the co-borrower can waive his responsibilities and under what conditions. As a rule, the answer is yes, but some credit institutions charge a separate commission for reviewing the issue.
Find out what package of documents you need to collect.
Prepare all the papers and, together with the main borrower, submit them for verification by the bank. Typically, the application is treated as a new loan. After all, previously the co-borrower acted as an additional guarantee for the repayment of the debt, but under the new conditions the lender faces an increased risk. He must evaluate whether the title borrower's income is sufficient to pay the remaining balance of the loan. If not, you may be advised to include someone else in the deal instead of yourself.
Wait for the bank's decision. It is quite difficult to predict the answer, because it depends on many factors.

Important! The borrower's current spouse cannot be exempted from participating in mortgage payments. This is only possible after a divorce.

If the bank makes a positive decision, sign an additional agreement to the loan agreement. Such an important change in its terms must be documented in a separate document.
Wait a couple of months for your credit history to update and apply for a mortgage.

If you don’t want to wait that long, check with the bank when the data will be transferred to the BKI, and independently control the deletion of the record about you as a co-borrower. Or take a certificate of no obligations on this loan. It must be provided in the package of documents for obtaining a mortgage. When considering your application, the obligations of the co-borrower will no longer be taken into account, which means that the chances of getting a loan are much higher.

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Author:

Mortgage specialist Maria Yurievna Sokhan

Date of publication May 7, 2019 July 16, 2019

Disadvantages of participation in the agreement for a co-borrower

After concluding a loan agreement, the co-borrower imposes an encumbrance in the form of loan obligations. This means that he appears in the Credit History Bureau as a person who has unclosed credit obligations to the bank. In this regard, a person is more likely to be unable to:

Apply for a loan on your own behalf.
Get a credit card with a high or medium limit.
Act as a co-borrower under another loan agreement.

In most cases, these restrictions prevent a person from realizing his own plans. Therefore, before becoming a co-borrower, you need to think ahead: perhaps in the near future you will need to get a loan for yourself, which may cause great difficulties. For these reasons, some co-borrowers try to exit the loan agreement early.

Before signing the documents, you should think about whether you will need to get a loan for yourself in the near future.

Based on the foregoing, the appropriateness of the role of a co-borrower is observed to a greater extent when applying for a loan or mortgage for family needs - when the borrower and the co-borrower are members of the same family. In other cases, problems occur extremely often.

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about the author

Klavdiya Treskova - higher education with qualification “Economist”, with specializations “Economics and Management” and “Computer Technologies” at PSU. She worked in a bank in positions from operator to acting. Head of the Department for servicing private and corporate clients. Every year she successfully passed certifications, education and training in banking services. Total work experience in the bank is more than 15 years. [email protected]

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Who can be denied a mortgage?

Since 2021, banks have begun to more carefully check borrowers for solvency. Some banks increased the amount of the down payment from 20% to 30%, others began to require additional documents.

Self-employed and individual entrepreneurs work for themselves. Their salaries are unstable, so banks try not to issue long-term loans to such citizens.

Workers in catering, restaurant business and travel agencies are considered risky borrowers, as these areas were hit the hardest by lockdowns. If new restrictions are introduced, these people may lose their jobs, so they will not be able to pay their mortgage. To increase your chances of getting a mortgage approved, involve co-borrowers or take out a mortgage secured by a vehicle or other real estate.

Read about which apartments you cannot buy with a mortgage here.

Comments: 2

Your comment (question) If you have questions about this article, you can tell us. Our team consists of only experienced experts and specialists with specialized education. We will try to help you in this topic:

Author of the article: Klavdiya Treskova

Consultant, author Popovich Anna

Financial author Olga Pikhotskaya

Michael
04/08/2021 at 06:32 Hello, question: I am a co-borrower on my spouse’s mortgage, she is bankrupt, the case has been declared closed, and now the bank is demanding the missing amount from me. Through the bailiffs, all the property was sold legally, they are doing what to do. Should I file for bankruptcy or what?
Reply ↓ Anna Popovich
04/08/2021 at 20:07
Read also: Apartment rental fraud: popular fraudulent schemes for rental housing
Dear Mikhail, in accordance with the law, if spouses have common obligations secured by their joint real estate, its implementation occurs in the bankruptcy case of the spouse. If you are financially insolvent, then you can initiate bankruptcy proceedings against yourself.
Reply ↓

Consequences for a co-borrower in the event of bankruptcy of the main borrower

The main consequences for joint borrowers in the event that the main borrower stops paying mortgage obligations are:

accrual of penalties, fines and penalties provided for in the contract;
the lender has the right to demand early repayment of the remaining amount of the mortgage along with any interest due.
the possibility of transferring debt to third parties, most often we are talking about collectors;
by a court decision, the creditor may demand the seizure of other property of the co-borrower/s, from the sale of which it is possible to repay the resulting amount of debt of the borrower under the mortgage agreement;
in case of refusal of the borrower's mortgage obligations, the lender will forward all claims to the co-borrower (co-borrowers) or guarantors.
failure to pay one mortgage debtor negatively affects the credit history of all debtors.

If the borrower is declared financially insolvent by the court, the co-borrower will face the following consequences:

the contract with co-borrowers is automatically terminated;
mortgaged housing will be sold at auction;
those living in mortgaged housing will be evicted “to the street”, regardless of their age, status, etc.;
If the property of the main debtor does not satisfy the requirements of the mortgage lender, then the property of the co-borrower may also fall into the bankruptcy estate in the bankruptcy case.

In order not to take the situation to extremes, it is necessary to consult with lawyers in a timely manner. Our company provides consultations both online and offline at the telephone numbers and addresses listed on the website.