Person Guarantee Fine Print

November 07, 2022

by a searcher in United States

Just spoke with two searchers going through the SBA 7a bank process... is it common knowledge that the PG related to the equity in your home is a preemptive lien on your home?

It was my understanding that if you became a default risk with an SBA 7a, then they'd move towards a lien on your home. Surprised to learn in the underwriting process they mandate a lien on your home if it's a portion of your net worth.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Steve, great question. The lien on the home is not exactly directly related to the personal guarantee. The SBA has a collateral test on all SBA loans that are made. If the loan is deemed fully secured by real estate, equipment or other assets based on the SBA's collateral parameters and guidelines, then you do not need to pledge a second on your home or pledge additional collateral. However, if there is not sufficient hard collateral based on the SBA guidelines (which is often the case if there is goodwill involved in a transaction), then the lender is required by the SBA to take as collateral any additional assets that any 20% or more Guarantor might have in which there is equity. Most often this equity is found in a personal residence, investment property, or a non-retirement brokerage account (where the money is not being used as part of the down payment). The Bank is required to have you pledge as much in other assets as is possible to meet the SBA collateral requirements. The SBA does not require more collateral than is necessary to meet these requirements. If you cannot meet the SBA collateral requirements, then the Bank can and typically will still do the loan, but if you have the assets to pledge as additional collateral the Bank is required to take them by the SBA to further secure the transaction or the Bank may not end up with a valid government guarantee on the loan.

So as you can see, the pledge of a home is not because of your guarantee, but it is because of the collateral test. If you do have sufficient outside collateral meeting the SBA guidelines, then there should not be a need to put a mortgage on your home. However, some lenders may still require it to further strengthen the loan. In that case it is an individual lender decision and not a requirement of the SBA. Also, typically if you do not have 10% to 15% or more equity in the home, the lenders will not bother taking it as additional collateral. The SBA does not require the Bank to take it if there is no real equity there. Again, some lenders may still require it to be pledged even if it does not provide much equity support even though the SBA does not require it.

If you would like to discuss the risks and way an SBA personal guarantee works, I would be more than happy to do so at anytime. You can reach me here or directly at redacted Thank you and have a great day!

Reply by a searcher
from The University of Chicago in Chicago, IL, USA

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