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Personal Guarantees and Hard Money Loans

Lender Meeting with Clients

When it comes to hard money loans, what are the personal guarantees that lenders expect?  Before going into that, you need to know the difference between a full recourse loan and a guarantee.  Your hard money loan is either a full recourse loan, meaning the lender can lawfully pursue the borrower’s other assets to pay the debt if the borrower’s collateral is not enough to cover the loan, or a non-recourse loan, meaning the borrower’s assets are protected as being separate entities and can not risk being liquidated.

Most hard money loans are full recourse loans and the lender will also require a guarantee.  When you agree to a full recourse, personally guaranteed hard money loan you are telling the lender that you are committed to the project, which in turn makes your project less of a risk for the lender.

To illustrate further, consider this example.  A borrower owns a duplex that is titled in his personal name.  He gets a full recourse loan without a personal guarantee. The borrower defaults on the loan and the lender can not recover the entire amount of the debt.  This means the lender can now sue the borrower whose assets are now at risk, especially that duplex in his name. On the other hand, if the borrower has the title of the duplex in an LLC, the hard money lender can not go after the property to secure an outstanding debt because the duplex is considered a separate entity.

To put it simply, a full recourse loan limits the borrower and because of this, most hard money lenders will also require a personal guarantee from the borrower as well as any separate, related entities so that when the times comes to collect a debt, the lender has many ways to do this if collateral is not enough to cover it.

What is a Personal Guarantee?

There are three basic types of guarantees: 1. Unlimited Personal Guarantee; 2. Limited Personal Guarantee; and 3. Conditional Personal Guarantee.

Unlimited personal guarantee 

This means that the entity issuing the guarantee is guaranteeing to pay back the entire outstanding loan amount plus accrued interest, legal fees, and any other costs associated with collecting the loan.

Limited personal guarantee

This means that there is a set dollar on the amount of liability and is common when there are several entities involved in the loan.

Conditional personal guarantee 

This requires an event to take place in order for the guarantee to be valid.  For example, a loan with minimal risk may only invoke the guarantee when certain  conditions are not met by the borrower.

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