Guaranteed to Pay! -Be careful when helping somebody with a mortgage.
In this difficult market many people seek help in getting a mortgage approval from a friend or family member who is asked to Guarantee their mortgage. A recent high profile $1.5 billion claim [see below] brings to mind the importance of understanding the risks and obligations typically associated with helping someone by guaranteeing their loan.
1. You are Fully responsible for the entire debt.
If you guarantee somebody’s loan, you are not simply responsible for a share, or half, or a portion of the amount borrowed. You are, in fact, agreeing to pay the entire amount owed under the loan, plus any associated collection costs, penalties, etc., until everything is paid in full.
2. The lender does Not have to try to first collect from the principal borrower.
The Bank or Lender does not have to first try to collect their funds from the principal borrower. The lender can proceed right to you to claim all debts owed under the loan without even having to go to the borrower. Lenders can choose who is most worth pursuing for the debt and pursue against one, the other, or both. In legal terms, the borrower and guarantor(s) are jointly and severally liable for the debt, meaning together and independently they are responsible to pay.
3. You Can be sued for the entire balance owed.
Under the terms of most Guarantees you can be sued for the entire balance owed in court, and a judgement can be obtained against you for the full amount. You will not be able to claim that it is the borrower who must make the payment first. A successful judgement could lead to seizure of your assets, bank accounts, home and other property.
Practical Tips for Buyers:
- Do not Guarantee a debt for someone unless you are confident that he or she will make payments under the loan.
- If you are Guaranteeing on a mortgage try to make sure that the home has enough equity so that if it is sold the debt can be paid in full.
- Always see an experienced real estate lawyer and obtain Independent Legal Advice on all the terms of the guarantee before signing.
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