My business partner and I formed a LLC in February and we’ve bought a couple of (cheap) investment properties under the LLC. One of the homes has been rehabbed and we’re at the point where we want to do a refi on the property (taking out 80% LTV). My business partner’s credit score is below average and since the LLC is new and we don’t have an established history, the lenders we’ve spoken with want us to sign as guarantors on the loan. I’m very nervous about doing this for obvious reasons, but mainly because I don’t want to be held personally responsible for the loan. We have all intentions of repaying the loan as promised, but when we formed the LLC, I thought that loans would go through the LLC and not through us personally.
Here are my questions (sorry there are so many):
If we were to default on the loan, could the lender go after our personal assets (the lender wants to see retirement account statements).
By signing a personal guarantee, would my spouse also be liable (even if he does not sign anything)?
Can’t the lender just use the property as collateral?
If I do sign as a guarantor, could I be held responsible for 100% of the loan if the business could not repay it for some reason?
I’m in PA if that matters.
Thank you for reading this!
In general, an LLC is simply a way to ‘shield’ the true ownership of a property. You will find that if you are dealing with residential loans, you are limited in the lenders that are available when a home is titled in the name of an LLC, and they will always require a personal guarantee. The only time you might expect money to be lent directly to the LLC is when you are doing a commercial loan, and even then you will need to have the LLC established for quite some time and have a track record of cash flow for the LLC.
I will try to answer your individual questions to the best of my ability(even though your broker should be answering these for you);
1.The property is the only collateral for the loan. The reason the lender wants to see retirement statements is to show your liquidity and evaluate your ability to repay the debt if something unforseen happens.
2. In regards to who is liable, the LLC is again simply how the title to the property is being held. The lender is making their lending decision on your personal credit history and assets (or at least one of the members of the LLC) Is your husband a part of the LLC? When I do LLC financing for my investor clients, I often do the name in the name of one member of the LLC only for simplicity sake. I then recommend that the other member(s) sign a document prepared by their attorney acknowledging their shared responsibility for repaying the debt. In short, if you are the only one on the loan, you are the only one responsible.
3.The property is what is being used as collateral for the mortgage…the mortgage document specifies what the collateral for the loan is, and the note is the borrower’s personal acknowledgment that they are responsible for repaying the loan.
4. I believe I answered this above…if you are signing the note, you are personally responsible for repaying the debt.
If you have any additional questions, please feel free to post here and I will again answer to the best of my ability.