Almost all real estate loans – commercial and residential – require a personal guarantee .While this aspect of the loan is possibly the single most important facet of a real estate loan that borrowers should understand, it also tends to be one of the least discussed and least understood parts  of real estate lending.

There are 2 ways that a borrower may end up being personally liable for a real estate loan. The most common way is by signing a promissory note (therefore being the “borrower”) related to a real estate loan.  In residential loans the borrower is almost always the party that owns the home.  By signing the promissory note they become liable for repayment of the full amount owing to the lender.  In Colorado it is up to the lender if they want to take the house, pursue the individual, or both. In other states (such as California) the lender can do one or the other but not both.

Let’s follow this example for a Colorado real estate loan:  You buy a home for $400,000 and make a 20% down payment.  You borrow 80% or $320,000 from XYZ Lender. A decline in residential values lowers the value of your home to $300,000. You decide you don’t want to make your first mortgage payments anymore and stop making them.  XYZ Lender forecloses against your home (which process takes about 5 months in Colorado) and by the time your foreclosure reaches the sale date set by the Public Trustee ) , you now owe XYZ Lender $350,000 – part of which is delinquent interest and part of which is legal and other fees the lender has incurred for which you, as the  borrower, are responsible At the Public Trustee Sale the Lender “bids” $300,000 (which may be the fair value of the home at that date).  99 times out of 100 the Lender ends up taking title to your house.  Are you off the hook?  No – your problems may just be beginning.

You owe the Lender $350,000 but the Lender “bids” $300,000 leaving a $50,000 “deficiency”.  The house pays off $300,000 of your loan but you still owe the Lender the $50,000.  If the Lender wishes to do so, they will file a law suit against you asking the Court to create a judgment of $50,000 against you (and your wife if she also signed the Promissory Note).  You do not have much of a defense to this law suit since you signed a Note and you owe the money.  If the judgment is “entered” it then becomes a “deficiency judgment”. The Lender can proceed to garnish your salary – seize any money in any bank accounts (that they can find) and if they want to be very aggressive seize and sell all of your personal property – your car – your art works – anything you own.  This doesn’t happen very often – but legally it could.

Some borrowers try to negotiate with their Lender to see if the Lender will waive this deficiency but you are basically at the mercy of the Lender.  It is completely up to them.  What are your options in a residential loan to avoid these unfortunate possibilities – really you don’t have any.  In the real world no bank or life company is going to fund a residential loan without your personal guarantee.  Your only defense is to understand clearly before signing loan documents what they mean and that it can lead to a deficiency judgment if you don’t pay per the terms of the agreement.

Disclaimer / This blog is written by Bob Amter drawing on his 41 years of private money lending in Colorado.  Bob is not an attorney and any legal information discussed in this blog is Bob’s own personal understanding of certain lending practices and is not intended as legal advice for any of his readers.  Bob not only advises borrowers who are working with Montegra to use an attorney to represent them – he requires it.

[google_authorship], because of his more than 40 years of experience in funding hard money loans, is considered an authority on hard money or bridge financing.  He frequently speaks at meetings and conferences and writes articles on these subjects.