borrower

A borrower is a natural or legal person who takes out a loan from a financial institution and thereby undertakes to repay the principal amount plus interest. In the real estate sector, the borrower is generally the buyer or developer who finances a property in whole or in part with external funds. The borrower’s creditworthiness is the key factor determining the interest rate, loan amount, and term.

Obligations and Rights of the Borrower

The loan agreement imposes significant obligations on the borrower:

• Interest and principal payments must be made on time and in the agreed-upon amount
• Duty to disclose information: notify the lender of significant changes in financial circumstances (e.g., job loss, additional borrowing), if contractually agreed
• Provision of collateral: typically the registration of a land charge on the financed property

At the same time, the borrower has rights, including the statutory right of withdrawal (14 days after the contract is signed) and the right to early repayment subject to a prepayment penalty. After a ten-year term, there is also the statutory special right of termination under Section 489 of the German Civil Code (BGB)-a protection that many borrowers are unaware of and therefore do not utilize.

The requirement to create a land charge is initially unfamiliar to many borrowers: The bank is registered as the creditor of a land charge in Section III of the land register. This land charge is not a mortgage-it is abstract, meaning it applies regardless of the actual remaining debt. Upon full repayment of the loan, the borrower is entitled to a release of the land charge or its assignment for future financing.

Credit Check: How Banks Assess Borrowers

Before approving a loan, banks assess the applicant’s creditworthiness based on several criteria:

• SCHUFA Report: Payment history, existing liabilities
• Proof of income: Pay stubs, tax assessments, profit and loss statements for self-employed individuals
• Equity ratio: At least 20% of the purchase price plus ancillary costs recommended
• Loan-to-value ratio: Ratio of the loan amount to the property’s appraised value

A good credit score leads to better terms-typically, interest rate discounts of 0.2 to 0.5 percentage points for excellent credit versus merely adequate credit. For a loan of €400,000, an interest rate difference of 0.3 percentage points over 15 years results in a difference of approximately €18,000 in total interest costs.

Banks also assess what is known as debt service capacity: The monthly net income must cover the loan payment, living expenses, and a safety buffer. As a rule of thumb, the monthly loan payment should not exceed 30-35% of net income.

Special considerations for multiple borrowers

Married couples or life partners often act as joint borrowers. Both individuals are then jointly and severally liable-the bank can demand full payment from either party. This improves creditworthiness and usually allows for higher loan amounts, but requires clear agreements in the event of a separation. In the case of a divorce, one party taking over the loan can become complex and generally requires the bank’s consent.

For unmarried couples, a partnership agreement or a clear provision in the loan agreement is advisable regarding how the loan and the property will be handled in the event of a separation. In the absence of such a provision, a foreclosure sale may be the least desirable but legally simplest solution.

Practical Tip for Homeowners in Nuremberg and Franconia

Due to price levels, the Nuremberg real estate market often requires loans of 400,000 euros or more. We recommend that prospective borrowers optimize their creditworthiness early on: obtain a SCHUFA self-report, pay off unnecessary small loans, and document equity. We would be happy to introduce you to vetted financing partners in the region who can also competently assist with special cases such as self-employed individuals or investors. A financing confirmation before the property search significantly strengthens your negotiating position.

Frequently Asked Questions

Can I become a borrower as a self-employed individual?

Yes. However, self-employed individuals are generally required to submit tax assessments and financial statements for the past two to three years. Banks often assess self-employed individuals more conservatively than employees, as their income is more susceptible to fluctuations.

Can I repay the loan early?

For fixed-rate mortgages, early repayment is only possible upon payment of an early repayment penalty, unless the loan is more than ten years old (in which case the special right of termination under Section 489 of the German Civil Code [BGB] applies). Special repayment rights can expand the scope for early repayment without fees.

What happens if the borrower can no longer make the payments?

In the event of a payment delay, the bank will first issue a reminder; later, it may call the loan due and-following an unsuccessful dunning process-proceed with the foreclosure of the property. Early communication with the bank and a deferral agreement are the right course of action in emergencies.

How do I improve my credit score before applying for a loan?

Key steps: Pay off or reduce all existing small loans and overdrafts, cancel unnecessary credit cards, check your SCHUFA report for incorrect entries and have them corrected, and document your equity in a checking account. These preparations should begin three to six months before a planned loan application.

What is a financing confirmation and why is it important when buying real estate?

A financing confirmation is a letter from the bank confirming that the borrower is fundamentally creditworthy and can receive a financing commitment for a specific amount. It is not a binding loan agreement, but it signals to sellers and real estate agents that the prospective buyer is serious and financially capable of completing the purchase. In a tight market like Nuremberg, where attractive properties often find a buyer within a few days, a financing confirmation significantly strengthens your negotiating position. Sellers prefer prospective buyers with a confirmation, as the risk of a purchase agreement falling through is significantly lower. We recommend obtaining the financing confirmation before the first serious viewing-not just when a concrete offer is to be made. In the Nuremberg metropolitan region, both regional savings banks and cooperative banks as well as national direct banks typically issue such confirmations within one to three business days of submitting the documents.

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