Collateral property

Collateral property: what it is and when it may be required

Collateral property, in our case an apartment, acts as a guarantor when taking out a large loan. Contrary to popular belief, it is owned by the borrower rather than the bank. The lending institution merely places certain restrictions on real estate transactions until the mortgage is fully paid off.

Collateral real estate allows the bank to minimize its risks, because if monthly payments stop, the lending institution has the right to put the property up for auction, thereby fully compensating its costs.

The presence of an encumbrance on housing does not mean at all that the property owner is completely restricted in their actions. They have the right to register other people in the apartment, include it in a will, transfer it for temporary use, or rent it out. Of course, all of this is possible if the actions do not contradict the terms of the loan agreement. However, more serious transactions, such as a sale, can only be carried out with the bank's permission.

Selling mortgaged real estate is an extreme measure. Therefore, when submitting an application to the bank, you will need to indicate the reason why the owner wishes to sell the housing. So, most often borrowers decide on this step due to the following factors:

• moving to another city or country;
• inability to pay the loan;
• inheriting an apartment;
• the desire to change real estate to a more suitable one (in terms of location, area);
• the need to split the apartment due to divorce, etc.

What legal norms regulate the sale of pledged property

The very concept of a mortgage is fully regulated by Federal Law No. 102-FZ "On Mortgages (Pledge of Real Estate)" dated July 16, 1998. In particular:

1. Chapter 6 "Transfer of rights to property pledged under a mortgage agreement to other persons and encumbrance of this property with the rights of other persons."
2. Chapter 10 "Realization of pledged property against which foreclosure is levied."

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Methods for realizing pledged real estate

There are several ways to sell mortgaged real estate in total. It all depends on the capabilities of the seller and buyers. The simplest sales method will be early repayment of the mortgage, which, in fact, does not even require coordinating the transaction with the bank. It is slightly more difficult to do this directly through the bank itself, when the entire transaction, including the search for a buyer, is managed by the lending institution. And the most difficult way to sell collateral real estate is to transfer it along with the mortgage to a new owner. Let's look at each of the options in detail.

Early mortgage repayment

This simplest method of selling collateral real estate is to fully repay the mortgage early and then carry out the sales transaction. It is simple because in this case the housing owner will not need to obtain bank approval. There are many ways to close a loan early: pay it off from personal funds, borrow money from relatives, or take out another loan. In the current economic situation, all of this is unlikely. Especially if the amount for early repayment is too large.

In this case, the seller can turn to the buyer for help, specifically asking for a deposit in the amount of the missing sum. Despite the fact that such a transaction takes place exclusively with the conclusion of an agreement, the buyer takes a risk in any case by providing a deposit to the seller. If the apartment owner turns out to be dishonest, it will be difficult to recover the money from them.

This procedure takes place as follows:

1. The seller and buyer draw up an agreement between themselves, which must be certified by a notary.
2. The borrower unregisters all people registered in the apartment, including themselves.
3. After the buyer transfers the deposit, they transfer it to the bank's account.
4. The bank lifts the encumbrance from the apartment.
5. The buyer re-registers the property in their own name.

Selling a mortgaged apartment through the bank

The second method does not differ much from the first — the only difference is that in this case the buyer transfers the money not to the seller, but brings it to the bank, meaning the creditor manages the property sales transaction from start to finish. In this situation, the buyer is better protected from fraud, and the seller will receive their money only after the housing is transferred to the ownership of the new owner.

The transaction takes place as follows:

1. A preliminary agreement is concluded between the buyer and seller indicating all the terms of the future purchase and sale agreement.
2. The buyer deposits an amount equal to the full price of the apartment into the bank. The part that will go toward early mortgage repayment goes into the creditor's safe deposit box, and the remaining amount goes into another box.
3. Next, the bank applies to Rosreestr with all documents to lift the encumbrance on the housing.
4. After the apartment becomes the property of the buyer, the seller can present an extract from the USRN to the employee and receive their money from the safe deposit box.

Transferring the mortgage to a third party

The most difficult option for reselling collateral real estate is to transfer it to the buyer along with the mortgage, meaning shifting the obligations to the bank to another person. In this case, the seller will need to obtain approval from both the creditor and the buyer. Moreover, getting it from the bank will be much more difficult, since it will impose the same requirements on the new apartment owner as on the primary borrower.

If both parties agree to the transaction, it takes place as follows:

1. The bank concludes an agreement according to which the remaining part of the mortgage is transferred to the buyer.
2. The seller and buyer draw up a purchase and sale agreement.
3. The primary borrower signs an agreement on the assignment of the debt obligation.

How to sell an apartment purchased with maternity capital

It is much more difficult to sell an apartment purchased using, among other things, maternity capital funds, since such an action must be coordinated not only with the bank, but also with guardianship authorities. Therefore, the transaction can only be concluded taking into account that:

1. The child for whom the certificate was issued has already turned 3 years old.
2. The children's housing conditions will be better than in their current home, meaning the number of square meters per each minor family member will increase.
3. The transaction is approved by the guardianship authorities.

Another significant difference in selling a mortgaged apartment purchased using maternity capital funds is that the seller is required to find new housing within six months and allocate shares in it to all minor children.

Can you purchase an apartment that is under encumbrance

Based on all of the above, we can answer yes, a buyer can purchase encumbered real estate. It can even be said that it will be much more profitable for them than if they were purchasing an apartment that is not mortgaged:

1. Since it is difficult to sell encumbered real estate, sellers are forced to sell apartments below their estimated market value.
2. In cases where the transaction goes entirely through a bank, the buyer does not have to worry about encountering fraudsters.

Like any transaction, this one is inherently associated with risks. So, what are the specific risks for the buyer:

1. The buyer faces the most risks specifically at the stage of transferring money to the seller, especially if the owner sells the apartment with early repayment, partially using funds from the second party to the transaction. For example, the apartment owner may change their mind about selling or pass away, and difficulties may arise in removing the encumbrance.
2. When transferring the apartment along with debt obligations, the buyer may assume the obligation to pay fines and penalties if the seller has defaulted on the loan.
3. Ultimately, the bank may not approve the buyer's candidacy as a borrower. If the second party provided the seller with a deposit, getting the money back even through court will be very difficult.

In addition, there are situations where the bank can independently realize the collateral property without obtaining the owner's consent. This happens if the borrower regularly violates the terms of the credit agreement or refuses to fulfill their obligations altogether.

In this case, the creditor has the right to sue the debtor and, with the judge's permission, put the property up for auction. The amount obtained from the apartment goes toward paying court costs, auction organizer services, fines and penalties accrued for non-fulfillment of obligations, and mortgage repayment.

Moreover, this transaction is not profitable for the debtor. Banks most often sell the apartment for an amount that differs significantly from the estimated value because the property needs to be realized quickly.