If you’re wondering how the term personal guarantee works in the real estate market, you’re in the right place. Everything you do or say has an impact, as we all know. Especially when it comes to operating a business, certain terms have more meaning than you may think. However, we will not be diving into the
If you’re wondering how the term personal guarantee works in the real estate market, you’re in the right place. Everything you do or say has an impact, as we all know. Especially when it comes to operating a business, certain terms have more meaning than you may think. However, we will not be diving into the other terms, but we will be covering everything there is for you to know regarding personal guarantee. Continue reading on as this will surely help you.
What Does Personal Guarantee Mean?
The term personal guarantee refers to when a person makes a legal promise. This legal promise includes a person making this guarantee swears to pay back a loan, for instance. This also means that when a person provides a personal guarantee, if the individual cannot pay back the loan, he will be personally responsible.
A personal guarantee is another way for creditors to assure extra protection. They may receive back the loan taken from them.
Types Of Personal Guarantees In The Real Estate Market
Before we head into how it works, we need to differentiate between the types of personal guarantees. This will help you understand the term in the real estate market even more. Here are the types of personal guarantees and their definitions.
Sole Unlimited Personal Guarantee
If you’re borrowing money and are the sole owner of your company, creditors may ask you for a sole guarantee. This means that you would be personally responsible for repaying the loan.
Joint Unlimited Personal Guarantee
Where there is more than one person involved in a transaction, creditors may ask for a joint guarantee. This type of guarantee is quite common when a business taking a loan has two or more owners in partnership. This guarantee means that the loan taken would become the responsibility of each partner to pay back the loan.
Joint and Several Guarantee
This type of guarantee refers to the process wherein a lender requires a commitment from all the involved partners of a company.
The guarantee allows the lender to pledge a guarantee ensuring that they will jointly and separately be responsible for ensuring loan repayment. This also means a lender could pursue each partner for the whole amount or go after the whole group instead.
Limited Personal Guarantee
This type of guarantee is good for borrowers but not for lenders. ‘Limited’ suggests that the borrower won’t have to repay the whole amount if there is outstanding balance and collateral liquidation. The remaining payback amount is a loss for a lender.
Declining Personal Guarantee
This is probably the best example of a personal guarantee in real estate. This particular type of guarantee refers to units sold. The loans are paid down, and the guarantee declines alongside this.
How Does It Work In The Real Estate Market?
As we have mentioned the types of personal guarantees, you might now have an idea as to how personal guarantees work. A personal guarantee is a promise of a person (borrower) to pay back the money loaned (from the lender). Therefore, if you borrow money to invest in a real estate project in the real estate world and it fails, the lender has to foreclose on the property.
The borrower will have to pay the difference between collateral proceeds and outstanding balance. And this is if the real estate doesn’t have enough value.