In the South African property market, signing surety is a common occurrence to help you get home loan approval. This usually takes place when the person who is applying for the home loan doesn’t meet the financial standards required by the lenders they are applying for home loan financing from.

“Signing surety for someone typically involves a third party, usually a relative or someone close to you. By signing a surety, this third party agrees to take over repaying the loan if the primary applicant defaults on payments. This is a valuable tool to overcome the financial hurdles involved in the home loan process. You do need to understand the implications of signing surety for each party involved.” – IGrow legal and tax team

At IGrow, we have financial planners and lawyers on our team who will be able to advise you on the ins and outs of suretyship. We’ll explore this in more detail below.

Understanding surety regarding home loans

Signing surety involves a third party, otherwise known as “the surety”, who agrees to take over the borrower’s obligations if they default on home loan repayments. In terms of legal compliance, the surety then becomes a co-principal debtor. 

In other words, the financial lender can follow up with the surety to fulfill repayment. They won’t need to pursue exhaustive options with the primary borrower. This agreement offers the lender added security and can be a determining factor when approving your home loan. (Source)

“Signing surety for another person, whether family, business partner or friend, can seem like a simple formality in order to help that person successfully conclude an important transaction. But before signing on the dotted line, make sure you know what you’re in for.” (Source)

Signing surety means that a third party commits to fulfilling the borrower’s obligations if they fail to do so. In legal terms, the person signing surety becomes a co-principal debtor, meaning the lender can pursue the surety for repayment without first exhausting options with the primary borrower. This arrangement provides the lender with additional security and can be a decisive factor in approving a home loan application. (Source)

“Therefore the objective of the surety agreement is to limit the potential of loss to the lender that may arise if the purchaser defaults on the terms of the agreement. The purchaser will always remain liable for his obligations in terms of the loan agreement, and the surety’s obligations will commence only if the purchaser fails to fulfil his obligations.”- Wessel de Kock, of Snymans Inc. Attorneys (Source)

When signing surety for someone, what should you take into account?

When you look into signing surety for someone, you must consider the borrower’s financial standing and ability to pay their bond repayments. As the surety, you are legally bound to take over the home loan repayment should they fail to pay. It’s a bit like being someone’s insurance policy!

It is advisable to set an amount for the suretyship that sticks to a time limit. This reduces the major financial risk if the primary borrower defaults on payment.
When you look into signing surety for someone, make sure you examine their credit score, credit history, and financial history. If the person’s credit history shows multiple payment defaults, this is a huge red flag. By standing surety, you are legally bound to stand in and pay the primary borrower’s repayments that were defaulted on.

Tips to consider if you are going to stand as a “guarantor” for someone else’s loan:

• Ensure you understand the responsibilities of standing surety for the primary borrower’s debt
• Ensure you know the exact amount of debt you will need to pay if the primary borrower is unable to.
• Put a limit on the amount you are standing surety for, rather than being tied to the person. Otherwise, you could end up paying other debt they raise later on.

Put a limit on the suretyship amount. This makes things finite, and each party can see what their financial responsibilities are. (Source)

The process involved in someone signing surety for you to secure your home loan

The procedure involved in signing surety for a home loan includes a formal agreement in which the surety agrees to the borrower’s debt obligations. This agreement needs to be in writing and signed off by the surety in order to be legally binding. 

Ensure that everyone involved reads the terms and conditions of the suretyship agreement. There will also be a primary loan contract, so everyone is aware of their obligations in their respective roles.

The person who signs surety for a bank home loan: Who can be a surety?

The person who signs surety for a bank home loan is usually on a stable financial footing. Financial lenders usually only allow someone to stand surety if they are your spouse. Parents are only allowed to sign surety if their adult child is still living with them. Surety for bonds are not allowed from friends and general family

It is significant to note, once you are made a surety, this can affect your personal creditworthiness. If the borrower misses a payment, you are responsible for their debt, or to the amount agreed upon in the suretyship agreement.

Note that for company bond applications (if you are building your property portfolio in a company), the directors of companies will be required to sign as surety.

What are the legal implications for the surety?

The person who signs surety for the bank home loan carries the load of substantial legal responsibilities. They will be held accountable for their commitments as the surety. 

In the case that the borrower defaults on home loan repayment fees, the lender can opt to take legal action against you to reclaim any outstanding debt. This can even resort to “garnishing your wages” or seizing your assets.

“Garnishing your wages” means that a part of your salary is withheld to repay the borrower’s debt. “Seizing assets” means the financial lender can seize something like your personal property to repay the borrower’s debt.

It is vital to assess your ability as the surety to repay the borrower’s loan before you ever agree to act as the surety.

Conclusion

Agreeing to sign surety, is a big obligation, and shouldn’t be undertaken without due consideration and assessments of each party’s financial standing and credit history.

It can be a major help to someone in securing their home loan, but make sure you fully understand what you are all in for, before pursuing this avenue. It’s best to consult your own lawyer and tax consultant to review the deal.

If you have a good grasp of what it means to sign surety, each party involved can make the best decision possible to protect each other’s financial well-being. At the same time, it can be very rewarding to stand surety for a loved one, and help them become a property investor .

Contact our legal and tax consultants at IGrow to present your surety case to us. We will help you make the right moves as the primary borrower and the surety.