Types of guarantees on loans

Although they do not have to be, in most cases, a hard money loan will need to be guaranteed by something. Typically, hard money loans are guaranteed by the “real property,” they are being used to pay for. That means that if you don’t repay the loan – you lose ownership of the property. In the event your property’s value isn’t enough to justify the loan – it’s not uncommon for hard money lenders to ask for some other form of personal guarantee. There are many reasons for this, the most important of which we will go over below. The hard money lender will likely require a personal guarantee from the borrower. This practice is also known as “putting skin in the game,” and it is quite common among lenders and borrowers in this situation.
Full Recourse Without a Personal Guarantee
If a borrower invests in a full recourse loan without a personal guarantee, the borrower must protect assets under another name in order to shield those assets from lien or lawsuit. Full recourse does mean that a borrower takes full responsibility for a loan, which means that all assets that are tied to that borrower are up for grabs.
Full Recourse Without a Personal Guarantee
A borrower may also use an outside entity such as an LLC to borrow. Even if this LLC takes on a full recourse loan, the borrower is protected against any seizure or action against assets that are outside of that LLC. Because the LLC is a business entity, it cannot give a personal guarantee. It is almost as if someone else is borrowing the money.
Because of the LLC shield and other protections that borrowers may have, many lenders do not allow LLCs to borrow money. They may also require a personal guarantee, which means a borrower cannot use an LLC to borrow in the first place.
The Different Kinds of Guarantees
Not all guarantees are the same. There are many different kinds – the unlimited personal guarantee, the limited personal guarantee, and the conditional personal guarantee.
The unlimited personal guarantee means that there is no limit on the amount of money that a lender can collect in reference to a loan. If the lender has to take the borrower to court in order to receive pay back, the borrower would be responsible for the legal fees as well as the interest that would accrue. If there were any other costs that were associated with the loan, the borrower would pay those as well.
A limited personal guarantee sets an arbitrary limit on the amount of personal liability that a borrower takes on. This type of guarantee is most useful with loans that involve more than one company shareholder. However, most limited personal guarantee contracts will contain a clause that converts a limited personal guarantee into an unlimited personal guarantee in the case of fraud. This clause is also known as a “bad boy” clause.
A conditional personal guarantee is not always valid unless there is a certain trigger event that takes place. For instance, if a loan has a low loan to value metric and the borrower is not taking on a great deal of risk, the guarantee may only become valid if certain conditions are not met.