Financing power of attorney

Financing power of attorney / Finanzierungsvollmacht

February 09, 2023

In addition to the agreement between the seller and the buyer, the purchase of a property also requires an entry in the land register. According to § 19 of the Land Register Code (GBO), this entry must be approved by the party whose right is affected. In the case of a property purchase, this is the owner. However, the owner will not consent to the registration until he has received payment of the purchase price. In most cases, the buyer will not be able to finance such an amount from his own resources. The solution is to take out a bank loan. This presents the buyer with a second problem: the financing bank wants collateral for the loan it is going to disburse, to guarantee that it will get the money back. Typically, this is in the form of a charge on the borrower's property, such as a land charge or mortgage. If the borrower has no other property, only the property still to be sold can be used as security. The buyer would therefore have to encumber a property that he does not yet own. This is where the financing power of attorney (also known as a pre-encumbrance power of attorney) comes into play. If the seller agrees to the premature encumbrance of the object of purchase for the purpose of financing, he grants the buyer a power of attorney in accordance with §§ 164 ff. BGB (German Civil Code) to the effect that the necessary mortgages are to be created. Such a financing power of attorney is usually recorded in the purchase contract. The notary ensures that the buyer only uses the financing obtained from the bank to pay the purchase price. This eliminates the risk of the seller not receiving payment.