A common misconception holds that closing in an LLC eliminates personal liability for the mortgage. It generally does not. Most DSCR lenders require a personal guarantee from the entity's principals.
These questions cover what that means in practice and what the entity structure actually provides.
Quick answer
Most DSCR loans require a personal guarantee from the entity's principals, meaning you remain personally liable for the debt even though the property is held in the LLC. The entity provides liability separation for property-related claims, not insulation from the mortgage.
Frequently Asked Questions
What is a personal guarantee?
A commitment by an individual to be personally responsible for a debt owed by an entity. If the entity defaults, the lender can pursue the guarantor's personal assets.
Do all DSCR loans require one?
Most do. Some larger commercial-style transactions offer non-recourse structures, but on standard residential investor loans a guarantee is typical.
What is the difference between recourse and non-recourse?
On a recourse loan the lender can pursue the borrower personally beyond the collateral. On a non-recourse loan the lender's remedy is generally limited to the property.
If I sign a guarantee, why bother with an LLC?
The entity still provides liability separation for claims arising from the property itself — tenant injuries, disputes, premises liability. That is distinct from the mortgage debt.
Who has to sign the guarantee?
Typically members or owners above a specified ownership threshold. On a multi-member LLC that may mean several people, each personally liable.
Is each guarantor liable for the whole amount?
Often guarantees are joint and several, meaning the lender can pursue any guarantor for the full amount rather than a proportional share. Read the specific terms.
Can I negotiate a limited guarantee?
Occasionally on larger transactions, though it is uncommon on standard residential investor loans. It is worth asking on a substantial deal.
Does the guarantee affect my personal credit?
It creates a contingent liability. Whether the loan reports to your personal credit varies by lender, but a guarantee can appear in credit analysis for other borrowing.
What are non-recourse carve-outs?
Even on non-recourse loans, certain acts — fraud, misrepresentation, waste, unauthorized transfers — typically trigger personal liability. These are commonly called bad-boy carve-outs.
Does a guarantee survive a property sale?
Once the loan is paid off in full at sale, the guarantee obligation ends. Read the release provisions to confirm.
What if my partner defaults?
Under a joint and several guarantee, the lender can pursue you for the full amount regardless of your partner's actions. This is a significant consideration in partnership structures.
Can I remove myself as a guarantor later?
Generally only with lender consent, typically in connection with a refinance or an ownership change the lender approves. It is not unilateral.
Does a guarantee mean my other properties are at risk?
In a default scenario, a lender pursuing a guarantee could seek personal assets, which may include other holdings depending on how they are held and applicable state law. Discuss asset protection with an attorney.
Do foreign national borrowers sign guarantees?
Typically yes. Enforcement across borders is more complex, which is one reason foreign national programs require larger down payments.
Is a guarantee negotiable in scope?
Sometimes the scope, timing, or burn-off can be discussed on larger transactions. On standard loans there is generally limited flexibility.
What is a burn-off provision?
A term releasing the guarantee once specified conditions are met, such as a period of performance or a leverage threshold. More common on commercial than residential investor loans.
Should I have an attorney review the guarantee?
On a significant transaction, yes. Guarantee terms vary and the liability is personal. Legal review is prudent, particularly with partners involved.
Does the guarantee change if I sell the LLC?
Transferring entity ownership generally requires lender consent and does not automatically release your guarantee. Selling the entity is not the same as selling the property.
Are guarantees enforceable?
Generally yes, subject to state law and the specific terms. They are standard commercial instruments and lenders do enforce them.
What should I understand before signing?
Who else is guaranteeing, whether it is joint and several, what triggers liability, and what would release it. These are the provisions that matter if anything goes wrong.
