Anyone looking to purchase a residential property using a construction loan will be advised by the bank to contribute a certain amount of equity. Under certain conditions, however, a construction loan can also be secured through a guarantee. In such cases, there are a few points to keep in mind.
Younger people, in particular, often haven’t yet had the opportunity to build up sufficient savings for a property. However, many banks require an equity contribution of about 20 percent for a construction loan. In these cases, a guarantee can provide a solution. A third party declares to the bank that they will assume liability should the borrower become unable to make payments.
Different Types of Guarantees
From a legal standpoint, the actual borrower—that is, the buyer of a property—enters into a separate contract with this third party. This contract specifies the circumstances under which the guarantor becomes liable. Financial institutions impose strict requirements for real estate financing. For example, such a guarantee must not be time-limited and does not expire even after the principal debt has been repaid. A guarantor is therefore liable with all of their assets—and remains so until all interest, fees, and the principal loan amount have been repaid.
In everyday life, there are several types of guarantees. They differ based on the repayment obligations. A default guarantee is considered the safest option for the guarantor. The guarantor is only held liable for repayment if the bank has exhausted all means of recovering the money from the actual borrower. A directly enforceable guarantee, on the other hand, means that the bank can enforce its claims even without this prerequisite. In such a case, the guarantor pays until the actual borrower is able to resume repayment.
Consumer advocates warn potential guarantors against the third option: a directly enforceable guarantee “with a waiver of the right to raise the statute of limitations.” Under this arrangement, the guarantor even waives the right to argue that a claim may already be time-barred.
Prospective buyers and guarantors should therefore inform themselves in a timely manner about the applicable terms and conditions. In any case, a prerequisite for a guarantee should be that the parties involved are each capable, independently of one another, of making regular loan payments.
