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Personal guarantee for mortgage

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investor13

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How does it work with personal guarantees for mortgages on multi-unit investment properties?

I know for the house mortgage you have to sign personal guarantee. But in the case of investment building, I want to limit my risk to losing the building and the downpayment only, if things were to go bad.

I don`t want to risk losing my house/personal assets.
(If I sign personal quarantee, my understaning is the bank could go after my house. Correct me if I`m wrong)

Anyway, if the building is cash-flowing and is a solid investment, is there a way to get mortgage without putting personal assets on the line?
 
QUOTE (investor13 @ Mar 21 2009, 10:17 PM) How does it work with personal guarantees for mortgages on multi-unit investment properties?

I know for the house mortgage you have to sign personal guarantee. But in the case of investment building, I want to limit my risk to losing the building and the downpayment only, if things were to go bad.

I don`t want to risk losing my house/personal assets.
(If I sign personal quarantee, my understaning is the bank could go after my house. Correct me if I`m wrong)

Anyway, if the building is cash-flowing and is a solid investment, is there a way to get mortgage without putting personal assets on the line?

Many investors believe, erroneously, that putting the property in a company`s name, that their financial liability is limited in event of mortgage default. Most banks, especially in these times, want more collateral than just the building. They want your personal convenant. And they will look to your personal convenant in event of default. I do not think there`s any way around that.

Here`s another thought - if you`re reluctant to put your personal covenant on the line, why would the banks feel enamoured to lend you hundreds of thousands of dollars? Banks are in the business to lend money. Not to be landlords. They will cover themselves at every given opportunity to mitigate risk.

Put yourself in the lender`s shoes and you can usually see why they require what they require.

Mike
 
QUOTE (investor13 @ Mar 21 2009, 08:17 PM) How does it work with personal guarantees for mortgages on multi-unit investment properties?

I know for the house mortgage you have to sign personal guarantee. But in the case of investment building, I want to limit my risk to losing the building and the downpayment only, if things were to go bad.

Anyway, if the building is cash-flowing and is a solid investment, is there a way to get mortgage without putting personal assets on the line?
Most lenders in Canada require a personal guarantee, for the full or a portion of the loan amount. Some do not require it if the loan to value (LTV) is below 50%. Shop around through a mortgage broker. There are some (but not many) lenders that do not require a personal guarantee over 50% LTV but expect to pay a much higher interest rate !

In the US it is a different story as most banks do NOT require a personal guarantee .. but that is why this nation is in such a mess. Consider this scenario that we encountered when walking through many apartment buildings in Texas:
Company A buys a building in distress, for say $5M, with $1M cash and $4M mortgage,with a 40% vacancy. It stuffs tenants of dubious quality in it, then shows a normalized rent roll to the next bank with a 5% vacancy and a new appraisal showing a $8M value. The new bank gives a loan of $6.4M. Buyer pulls out $2.2M cash after his initial $1M is returned, i.e. $1.2M profit in 6 months.

No personal guarantee. Bank sells off $6.4M loan for a big fee. Bank smiles and investor smiles. 3 months later: oops .. sorry .. 40% vacant again and bankruptcy .. no personal impact to neither bank nor investor .. legalized theft if you ask me .. This cannot happen in Canada .. but happened by the thousands in the US .. and still does .. no wonder their economy is in trouble .. and will continue to be in trouble .. as there is no personal responsibility by investors nor lenders !

QUOTE (investor13 @ Mar 21 2009, 08:17 PM) ...

I don`t want to risk losing my house/personal assets.

(If I sign personal quarantee, my understaning is the bank could go after my house. Correct me if I`m wrong)
A personal guarantee means that ALL personal assets are potentially at risk, including your house. Perhaps the spouse should own it ?

Hence: due diligence is key !
 
QUOTE Many investors believe, erroneously, that putting the property in a company`s name, that their financial liability is limited in event of mortgage default.

I know, what matters is who is listed on the mortgage. If mortgage is quaranteed personally, having property in company name won`t help.

I am not prepared to provide personal quarantees. (Your thinking is faulty, but I won`t go into discussing that right now. Presently, I just want to find out clearly what my options are, that`s all).

thomasbeyer2000

I am willing to pay extra for CHMC insurance. If mortgage is insured by CHMC, does that change anything with respect to personal guarantees? I mean mortgage would be basically guaranteed by CHMC, right? What is the point of "personal" guarantee if mortgage already guaranteed by CMHC?


Also, let me just play a devil`s advocate for a moment to understand the situation more clearly. Lets say the building is destroyed in a way which is not covered by building insurance (acts of war, civil disorder, terrorism, natural disasters, etc - every insurance has a very extensive list of what it will not cover). If I personally guaranteed the mortgage, that would immediately put me into bankuptcy and the bank will take everything I have. Anybody thinks otherwise? Or would CMHC somehow step in into the situation and repay the mortgage to the bank? (By the way, does CMHC have also long list of exclusion clauses?)
 
CMHC insures the bank, not the borrower. It is up to the borrower to make a prudent investment decision, and then to manage the investment effectively. No-one insures against war or insurrection etc.

Thomas is exactly correct in his assessment of what has happened in the USA.
 
QUOTE (GarthChapman @ Mar 22 2009, 07:43 PM) No-one insures against war or insurrection etc.

So maybe my "personal guarantee" should have the same exclusions?
 
QUOTE (investor13 @ Mar 23 2009, 06:07 PM) So maybe my "personal guarantee" should have the same exclusions?

maybe not .. you can always chose not to do a mortgage or a personal guarantee (i.e. lower LTV or higher interest rates) .. it is a free market ..
 
QUOTE (investor13 @ Mar 21 2009, 09:17 PM) How does it work with personal guarantees for mortgages on multi-unit investment properties?

I know for the house mortgage you have to sign personal guarantee. But in the case of investment building, I want to limit my risk to losing the building and the downpayment only, if things were to go bad.

I don`t want to risk losing my house/personal assets.
(If I sign personal quarantee, my understaning is the bank could go after my house. Correct me if I`m wrong)

Anyway, if the building is cash-flowing and is a solid investment, is there a way to get mortgage without putting personal assets on the line?

This is no different than if you are buying individual houses to rent out or multi-family. In fact I think multi-family is the better venture to take on.

Most financial institutions or credit unions will agree to a limit on your personal guarantee.
 
QUOTE Most financial institutions or credit unions will agree to a limit on your personal guarantee

What do you mean? There is always a limit on the personal guarantee - it`s limited by the amount of loan/mortgage (with interest and miscellaneous fees). The bank cannot go after all your assets, but only after what`s owed to them. For example if you owe bank $10,000 and have $50,000 in assets, the bank can only go after $10,000.

What would be an "unlimited" personal guarantee?
Are you saying that in certain circumstances there could be some sort of different limit, like only a portion of the mortgage amount? Is that what you mean by banks "agreeing" to limit guarantee?
 
QUOTE CMHC insures the bank, not the borrower

I read that CHMC insures the mortgage itself... But I`m new to this, so maybe I misread it. Are you saying that it`s the bank that gets CMHC insurance, not the borrower?

I am confused then... How come some investors were talking about getting CHMC insurance as if it was their decision?
 
QUOTE (investor13 @ Mar 21 2009, 07:17 PM) How does it work with personal guarantees for mortgages on multi-unit investment properties?

I know for the house mortgage you have to sign personal guarantee. But in the case of investment building, I want to limit my risk to losing the building and the downpayment only, if things were to go bad.

I don`t want to risk losing my house/personal assets.
(If I sign personal quarantee, my understaning is the bank could go after my house. Correct me if I`m wrong)

Anyway, if the building is cash-flowing and is a solid investment, is there a way to get mortgage without putting personal assets on the line?


Unless your loan to value is very low and the bank stands no chance of taking a loss if they have to foreclose on the property, they will require a personal guarantee - and you are correct, if you sign a personal guarantee, the bank can go after your personal assets (which is why they ask you to sign it, as the corporations liability is usually limited)

The only way to avoid a personal guarantee as mentioned above, would be in a situation where your LTV is very low and even at that, you`d probably wind up paying signifigantly higher rates than if you did sign the guarantee.

Hope that helps,
 
QUOTE (investor13 @ Mar 24 2009, 07:29 PM)
I read that CHMC insures the mortgage itself... But I'm new to this, so maybe I misread it. Are you saying that it's the bank that gets CMHC insurance, not the borrower?



I am confused then... How come some investors were talking about getting CHMC insurance as if it was their decision?


indeed .. you apply at a bank directly .. or via a mortgage broker indirectly and ask for a CMHC insured mortgage. The bank or mortgage broker gets the insurance for THEMSELVES, and as such, lowers their risk, and can turn this lower risk into an increased loan amount and/or a lower interest rate to you.



Banks under the Canadian Bank Act can lend only up to 80% loan-to-value. In addition they have to have certain cash requirements for loans. This cash requirement is much lower with a CMHC insured loan as the default risk by you is insured by CMHC. 0 risk to bank .. lower reserve requirements .. lower risk = more money lent at lower interest rates.



a big benefit of residential properties (incl. apartment buildings) over commercial like office towers, shopping centres, industrial parks ...



related link: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10261-Basic_Financing_Question_-_Apartment_Building.html
 
QUOTE (investor13 @ Mar 24 2009, 08:22 PM) What do you mean? There is always a limit on the personal guarantee - it`s limited by the amount of loan/mortgage (with interest and miscellaneous fees). The bank cannot go after all your assets, but only after what`s owed to them. For example if you owe bank $10,000 and have $50,000 in assets, the bank can only go after $10,000.

What would be an "unlimited" personal guarantee?
Are you saying that in certain circumstances there could be some sort of different limit, like only a portion of the mortgage amount? Is that what you mean by banks "agreeing" to limit guarantee?


What I meant was say you bought something for $400,000 and you qualified for a $320,000 mortgage. You could negotiate to limit your personal guarantee to say $75,000. If you dont then they can go after entire mortgage amount.

But lets face it you will probably sell the asset anyway and not even have to worry about any additional claim to personal assets. Worrying about a natural disaster destroying your property is not a good way of planning your future financial success.
 
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