What is a Guarantor?
In hard money lending, collateral alone doesn’t always satisfy a lender’s risk threshold. That’s where a guarantor comes in. If you’re pursuing financing for a fix-and-flip, new construction, or bridge loan, chances are you’ve been asked to sign a personal guarantee or provide a guarantor for the loan.
What Is a Guarantor?
A guarantor is an individual or legal entity that agrees to assume responsibility for the loan if the borrower fails to meet their loan obligations. In short, if the borrower defaults, the guarantor is legally obligated to repay the outstanding balance.
This doesn’t replace the collateral securing the loan. Instead, it adds a layer of security for the lender. Most hard money loans require a personal guarantee, even if the borrower is an LLC or Single Purpose Entity (SPE).
For example, suppose your LLC borrows $400,000 for a rehab project and defaults. In that case, the lender can pursue the personal assets of the guarantor, often you, the managing member, to recover what’s owed.
Why Lenders Require Guarantors
Hard money loans are processed quickly, with an asset-focused underwriting process that prioritizes speed and efficiency. But no matter how substantial the collateral is, lenders want to know someone is standing behind the deal.
Here’s why guarantors matter:
- They reduce risk: If the project fails, the lender has a secondary way to recover funds.
- They show commitment: Signing a guarantee means the borrower has real skin in the game.
- They prevent walkaways: Borrowers are less likely to abandon a deal if their personal credit or assets are at stake.
- They strengthen the application: A guarantor with strong financials can improve the terms or approval odds for borrowers with limited experience or liquidity.
Lenders aren’t just underwriting the property. They’re also evaluating the people behind the project.
Who Can Be a Guarantor?
In most hard money deals, the guarantor is one of the principal parties involved in the project, typically the managing member of the borrowing entity.
However, there are situations where a third-party guarantor might be brought in. For example:
- A newer investor brings in a partner with more experience to sign on as guarantor.
- A parent company guarantees the loan for a subsidiary or SPE.
Regardless of who the guarantor is, the lender will want to see proof that they have the financial strength to cover the loan if necessary.
What Do Guarantors Need to Provide?
Lenders typically require a full credit and financial profile for the guarantor, including:
- Personal credit report
- Bank statements or proof of liquidity
- Statement of assets and liabilities/Personal financial statement
- List of other real estate holdings or obligations/Schedule of real estate owned
This gives the lender confidence that if the deal goes awry, the guarantor has the means to rectify the situation.
Types of Guarantees
Not all guarantees are created equal. Some lenders offer flexibility based on the deal size, borrower profile, or asset type.
- Full Personal Guarantee
This is the most common form, where the guarantor is fully liable for the loan balance if the borrower defaults. - Limited Guarantee
The guarantor may only be liable for a portion of the loan, either a fixed amount or based on specific events (such as fraud or misuse of funds). - Springing Guarantee
The guarantee only activates under specific conditions, such as missed payments, loan term violations, or a default event. - Carve-Out Guarantee (“Bad Boy” Guarantee)
These are often used in larger commercial deals. The guarantor is only liable if specific “bad acts” occur, such as misrepresentation, misuse of funds, or voluntary bankruptcy filings.
For most residential or light commercial hard money loans, full personal guarantees are the standard.
Risks and Responsibilities of Being a Guarantor
Signing a guarantee is a serious legal and financial commitment. If the borrower defaults and the property doesn’t fully cover the debt, the lender can pursue the guarantor’s personal assets.
That includes:
- Bank accounts
- Investment accounts
- Real estate holdings
- Wages (in some jurisdictions)
It can also negatively impact the guarantor’s credit and ability to obtain future financing.
Before agreeing to be a guarantor, especially for someone else’s project, make sure you understand the loan terms, the project risks, and your exit strategy if things don’t go as planned.
How Guarantors Affect Loan Terms
A strong guarantor can improve the overall strength of a loan file. That may lead to:
- Faster approvals
- Lower interest rates
- Higher leverage
- More flexible draw schedules
On the flip side, if the guarantor has poor credit, low liquidity, or high existing debt, it may weaken the application or result in higher pricing.
Explore Loan Options That Align With Your Strategy
In hard money lending, the guarantor helps bridge the gap between the property’s value and the lender’s confidence in repayment. Whether you’re signing a personal guarantee or bringing someone in to strengthen your file, understand what’s at stake.
At Unitas Funding, we evaluate the complete picture of property, project, and people. If you’re seeking complex money financing and want to understand what role a guarantor will play, we’ll walk you through it. Whether you’re borrowing under an entity or backing a deal as a partner, we help you structure financing that works.
Visit unitasfunding.com to start the conversation.