Legally, at least one borrower must be on the title deed to qualify for a mortgage loan. However, most mortgage lenders prefer that all borrowers appear on the title. For those mortgage programs that permit non-occupant borrowers, this lender preference is typically waived. However, mortgage borrowers that are not on the title deed become guarantors, not co-borrowers. Since they do not have a legal interest in the real estate, they cannot execute a mortgage, pledging the property as collateral for the loan.
Mortgage Loan Requirements
Mortgage loans have two components. One is the promissory note, wherein the signors promise to repay the amount borrowed. The second part is the mortgage, which legally pledges the home as collateral, or security, for the loan. Therefore, all mortgage lenders prefer -- some will mandate -- that every borrower appears on the title deed. Since people cannot pledge collateral they do not own, borrowers, in addition to the deeded owner, become guarantors, not true co-borrowers. They cannot satisfy the second requirement, pledging collateral, of mortgage loans.
Since borrowers, who are not on the title deed, are not legal owners of the home being purchased, they cannot pledge the property as collateral. Therefore, these borrowers, by default, become guarantors. Legally, the difference is significant. Co-borrowers are responsible for making monthly payments as are primary borrowers. Guarantors are only responsible for loan balances after default by primary borrowers. From a lender prospective, this can create challenges if foreclosure becomes necessary.
Collateral and Security Issues
Borrowers on mortgage loans cannot pledge security, the real estate, that they do not own. For this reason, mortgage lenders prefer that everyone on the loan note also be on the legal title deed. However, mortgage programs often permit non-occupant, non-owner co-borrowers to sign the loan note. Unfortunately for lenders, this permission can complicate foreclosure proceedings, should they become necessary. Since non-titled co-borrowers cannot legally offer collateral for the loan, lenders collecting on a defaulted mortgage must follow local legal requirements to place any liens on co-borrower real estate, if they hope to generate collateral to secure repayment.
When all mortgage borrowers are on title, lenders have unencumbered rights to foreclose, or sell the home as collateral. Since at least one borrower must be on the title deed, most lenders can still foreclose on the home if there is a loan default. However, securing additional collateral for non-owner, co-borrowers usually requires legal action to sue other borrowers for repayment. Should additional borrowers refuse to pay off the defaulted mortgage loan, lenders must typically get court judgments to allow placing liens of other real property owned by co-borrowers.