Most fix and flip loans are closed in the name of an LLC, which leads a lot of investors to assume the debt stops at the entity. It rarely does. Buried in almost every rehab loan is a personal guaranty, and it is the document that lets the lender come after you personally if the deal goes sideways. This guide explains what a personal guaranty is, the difference between recourse and non recourse, the carve outs that can pierce a non recourse loan, and how to read the guaranty before you sign it.
What a personal guaranty actually does
When your LLC borrows to buy and rehab a property, the loan is technically the entity’s obligation. A personal guaranty is a separate promise, signed by you as an individual, that if the entity fails to pay, you will. It converts what looks like entity only debt into debt the lender can collect from your personal assets. That is the whole point of the document, and it is why lenders in the business purpose space almost always require one from every member with meaningful ownership.
Practically, the guaranty means the LLC wrapper protects you from ordinary liability, a slip and fall, a vendor dispute, but not from the loan itself. If the flip loses money and the sale does not cover the balance, the guaranty is what the lender points to when they want the shortfall from you personally.
Recourse versus non recourse
The single most important term to find in your term sheet is whether the loan is recourse or non recourse. A recourse loan lets the lender pursue your personal assets for any deficiency after they foreclose and sell the collateral. A non recourse loan limits the lender to the property itself; if the sale does not cover the balance, that is the lender’s problem, not yours.
Here is the reality for fix and flip financing: most short term rehab loans are recourse. Non recourse is more common on larger, longer term, or agency style debt. If a rehab loan is marketed as non recourse, read the fine print, because it almost always comes with bad boy carve outs that flip it back to recourse the moment you do something the lender considers misconduct.
The carve outs that turn non recourse into recourse
Bad boy carve outs are the trap door. Even on a non recourse loan, you personally become liable for the full balance if you trigger one. Common carve outs include fraud or material misrepresentation on the application, unauthorized transfer of the property, filing for bankruptcy to stall foreclosure, misapplying insurance proceeds or rents, committing waste on the property, or letting a mechanics lien sit unpaid on title. Do any of those and the non recourse protection evaporates.
The lesson is that non recourse is never a license to be careless. Keep the entity clean, do not move the property without lender consent, pay the subs so no lien attaches, and never fudge the numbers on the application. The carve outs are designed to catch exactly the behavior that a stressed borrower is tempted to try when a deal goes bad.
How much are you really on the hook for?
Run the math on a deal that does not work out. Say you buy at 150,000 dollars with a 60,000 dollar rehab, into a loan of roughly 195,000 dollars all in. The market softens and the finished home only sells for 240,000 dollars, but between price cuts, extended interest reserves, and selling costs you net 225,000 dollars at closing. The loan is covered, you eat a thin loss or a small gain, and the guaranty never gets tested. That is the normal outcome.
Now say the project stalls, you blow the term, penalty interest kicks in, and a distressed sale nets only 180,000 dollars against a balance that has grown to 205,000 dollars with fees. That 25,000 dollar deficiency is exactly what a recourse guaranty lets the lender collect from you personally. This is why your loan to cost and your exit plan matter so much: higher leverage means a bigger potential personal deficiency if the sale disappoints. Model the downside in the deal calculator, not just the base case.
Multiple guarantors and joint liability
If your LLC has partners, the lender usually wants a guaranty from each member above a certain ownership threshold, and those guaranties are typically joint and several. Joint and several means the lender can collect the entire deficiency from any one guarantor, not just that person’s ownership share. If you own 30 percent but your partners disappear, the lender can pursue you for 100 percent of the shortfall and leave you to chase your partners for their share. Structure your operating agreement with that risk in mind, and know who is actually signing before you close.
What you can negotiate
Guaranty terms are more negotiable than borrowers assume, especially with a track record. On some deals you can negotiate a burn down guaranty that shrinks as you hit milestones or pay down principal, or a capped guaranty that limits your personal exposure to a set dollar amount or percentage. First time borrowers rarely get these; experienced flippers with clean payoff history sometimes do. It never hurts to ask, and the ask itself signals that you read the documents.
You can also manage exposure by keeping loans right sized. If a longer extension option is available, that buffer can keep you out of a forced sale where the deficiency, and your personal liability, is largest. And running flips through a clean, well documented entity keeps the guaranty from being the only thing standing between the lender and everything you own.
How the guaranty touches your personal credit
A personal guaranty does not just put your assets at risk in a default. It can also affect your borrowing capacity while the loan is open. Because you have personally guaranteed the debt, a future lender evaluating you for the next deal may count that obligation as a contingent liability, even though the loan sits in an LLC. This is why serial flippers watch how many guaranties they have outstanding at once. Stack too many simultaneous guaranteed loans and the next lender starts asking harder questions about your aggregate exposure.
Most business purpose rehab loans do not report to your consumer credit the way a personal mortgage does, so a clean flip that pays off on time usually leaves no mark on your consumer score. But a default is a different story. A deficiency judgment on a recourse guaranty is a personal legal obligation that can be collected like any other judgment, and that absolutely follows you. The takeaway is to treat every guaranty as real personal debt for as long as the loan is open, and to keep the number of open guaranties in line with your actual capacity to cover a bad outcome on any one of them.
Managing this is mostly discipline: right size each loan, keep reserves against your worst deal rather than your average one, and do not let the LLC wrapper lull you into treating guaranteed debt as free of personal consequence. It is not.
Read it before you sign
Before you close, find three things in the loan documents: whether the loan is recourse or non recourse, the exact list of carve outs, and whether the guaranty is joint and several. If you cannot find them or cannot understand them, get them explained before signing, not after the deal goes wrong. The guaranty is the quietest, most consequential page in the whole file.
FMC Capital is a Pittsburgh-based brokerage that arranges fix and flip and rental financing for real estate investors across Pennsylvania and additional states. If you want help reading the guaranty and recourse language on a rehab loan, contact us or call 412-990-2941, and price your deal in the deal calculator or review our fix and flip and bridge loan options.
FMC Capital, NMLS #1840537. This article is for general educational purposes only and is not legal advice or a commitment to lend. Guaranty, recourse, and program terms vary by lender, entity, property, and borrower and are subject to change. All figures are illustrative examples, not quotes. Consult your own attorney on personal liability.