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.
Rights and obligations
If a person has been asked to help obtain a mortgage for an apartment, it is necessary to study in advance the rights and obligations of a co-borrower under a mortgage loan. The person acting in this role is responsible to the bank on an equal basis with the main borrower. If he cannot repay the debt due to objective reasons, the co-borrower on the mortgage loan will have to assume the obligation to repay the debt.
In practice, potential owners do not always distribute shares equally. To separate them in advance, the spouses enter into a prenuptial agreement or an additional agreement to the loan agreement.
An agreement between the borrower and the co-borrower can be concluded if the parties to the transaction are not spouses. In another situation, the bank may insist on concluding a marriage contract from the very beginning or if a number of difficulties arise. So, the need for it often arises when there are delays.
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
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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.
Co-borrowers without taking into account solvency
Borrower's spouse
The spouse of the borrower is a mandatory co-borrower, regardless of solvency and age. May be the owner of the property.
It is not included in the list of co-borrowers and is not a party to the transaction in 2 cases:
- If there is a valid marriage contract establishing a regime of separate ownership of the property of the spouses, including real estate. But this does not mean that it is not involved in the transaction at all. Even if there is a prenuptial agreement, the spouse may, if desired, become co-borrowers, taking into account their ability to pay.
- If the borrower's spouse does not have citizenship of the Russian Federation
Family member
A family member is a relative of one of the co-borrowers:
spouse, children, parents, grandchildren, brothers, sisters, nephews, grandparents), who is the owner of a certificate for the preferential purchase of real estate.
The owner of the certificate acts as a co-borrower without taking into account solvency with the obligatory assignment of ownership of the property being financed.
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.
Mortgage co-borrower risks
Attention
Acting as a co-borrower on a mortgage carries many risks. If the relationship between friends is good today, it does not mean that tomorrow they will remain the same. The main debtor may simply decide to set his friend up and refuse to pay the mortgage. Then all obligations will fall on the shoulders of the co-borrower, while his partner will retain ownership of the acquired property.
Often the financial situation of the main mortgage borrower changes. He repays the loan incompletely or in arrears. The bank, in turn, charges penalties and fines, the payment obligations of which also apply to the mortgage co-borrower.
If monthly payments are not made for several months, the creditor has the right to go to court. In case of a positive decision, the bailiffs impose a penalty on the money accounts and property of the co-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.
Right to an apartment
Having figured out what a co-borrower on a mortgage means, it is worth familiarizing yourself with the rights and responsibilities of the person. For the borrower and co-borrower they are almost identical. The principle of equality also applies to rights to collateral.
However, the fact that one of the citizens automatically becomes the owner of the home applies only to spouses who have officially registered their marriage. Moreover, such a rule applies not because a mortgage is issued, but because the property is classified as joint property. Who has what rights to real estate and who is entitled to what share is determined by agreement between the borrower and co-borrower. It is usually drawn up at the stage of obtaining a loan.
If the document has not been executed, the person helping to pay off the loan will have to prove ownership of the property. Actions will be carried out through the court.
It must be taken into account that the status of a co-borrower does not allow you to apply for real estate. However, this person can claim housing rights or demand compensation if they are denied a share.
By drawing up an additional agreement to the loan agreement, the parties to the transaction will be able to change the responsibility of the co-borrower:
- determine existing rights to collateral real estate;
- approve the nuances of closing the obligation to the bank;
- change liability from joint to subsidiary.
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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.
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.
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.
about the author
Anatoly Darchiev - higher education in economics with a specialty in “Finance and Credit” and higher education in law in the direction of “Criminal Law and Criminology” at the Russian State Social University (RGSU). Worked for more than 7 years at Sberbank of Russia and Credit Europe Bank. He is a financial advisor to large financial and consulting organizations. Engaged in improving the financial literacy of visitors to the Brobank service. Analyst and banking expert. [email protected]
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Who can act as a co-borrower on a mortgage loan?
The borrower and co-borrower of a mortgage must meet a number of requirements. So, usually the bank agrees to provide money for an apartment to persons over 21 years of age. There is also an upper age limit. Typically, funds are not issued to persons over 65 years of age.
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Cooperation is carried out only with officially employed citizens. The borrower must have income that would allow him to make payments on the mortgage loan. If the main recipient of funds for some reason is unable to continue repaying the debt, the responsibility for closing the obligation to the bank will fall on the co-borrower.
If the main borrower has sufficient funds to cover obligations to the bank, a thorough check of the co-borrower for compliance with the requirements is not carried out.
However, in another situation, in addition to the passport, the person acting in this role will have to provide the following package of documents:
- a completed application form to receive money for an apartment;
- SNILS;
- income certificate;
- a copy of the work book;
- education document.
Less often, a financial organization may require a reference from the place of work. The exact list of documentation directly depends on the internal policy of the financial organization.
Mortgage loan application forms:
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 Anatoly Darchiev
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 20:07Dear 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.
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