Personal Liability

Definition

Personal Liability in real estate refers to an individual’s legal responsibility for a debt. In the context of mortgage loans, this means that the borrower is personally responsible for repaying the loan. In most cases, mortgage loans are recourse loans, which means that the lender can look beyond the value of the property to the borrower’s personal assets for repayment. This is in contrast to nonrecourse loans where the lender’s recovery is limited to the property itself.

Examples

1. Example 1: Paul’s Real Estate Loan Paul, a private individual, takes out a mortgage loan of $100,000 to purchase a piece of land. This creates personal liability for Paul, meaning if he fails to repay the loan, the lender can take legal action to recover the outstanding amount, including going after Paul’s personal assets.

2. Example 2: Deficiency Judgment After Paul defaulted on his loan, the lender foreclosed on the property and sold it for $70,000. Because the sale did not cover the full debt, Paul still owes $30,000 plus the lender’s legal expenses. This outstanding amount is considered Paul’s personal liability and the lender can pursue it through a deficiency judgment.

Frequently Asked Questions (FAQs)

Q1: Can personal liability be avoided in mortgage loans?

• A1: Yes, through contractual clauses like the exculpatory clause or by obtaining a nonrecourse loan, a borrower can limit their personal liability.

Q2: What happens if I default on a loan with personal liability?

• A2: If you default on a loan with personal liability, the lender can foreclose on the property and may pursue a deficiency judgment to recover any remaining debt through your personal assets.

Q3: Is personal liability applicable to all types of real estate loans?

• A3: Personal liability is common in many real estate loans, but it depends on the terms of the loan agreement and state laws. Some loans, particularly commercial loans, may be structured as nonrecourse loans.

Q4: How does personal liability differ from corporate liability?

• A4: Personal liability pertains to individuals and places their personal assets at risk, whereas corporate liability pertains to corporations, typically limiting risk to corporate assets.

Q5: Can legal expenses incurred by the lender be included in personal liability?

• A5: Yes, legal expenses incurred by the lender in the process of recovering the debt can often be added to the borrower’s personal liability.

Related Terms with Definitions

1. Nonrecourse Loan: A type of loan where the lender’s recovery is limited to the value of the collateral, and they cannot pursue the borrower’s other assets.
2. Exculpatory Clause: A clause in a contract that limits or eliminates the liability of one party, in this context, potentially reducing the borrower’s personal liability in a real estate loan.
3. Deficiency Judgment: A court order that makes the borrower personally liable for the difference between the sale price of a foreclosed property and the amount owed on the mortgage.
4. Foreclosure: The legal process by which a lender takes control of a property due to the borrower’s failure to repay the loan.
5. Recourse Loan: A loan that permits the lender to pursue the borrower’s personal assets in addition to the collateral if the loan defaults.

Online Resources

• Investopedia - Personal Liability
• Real Estate Definitions - Library of Real Estate Terms
• HUD.gov - Glossary of Terms
• Nolo.com - Personal Liability Defined

References

1. Geltner, D., Miller, N., Clayton, J., & Eichholtz, P. (2013). Real Estate Principles: A Value Approach.
2. Brueggeman, W. B., & Fisher, J. D. (2019). Real Estate Finance and Investments.

Suggested Books for Further Studies

• “Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
• “Real Estate Principles: A Value Approach” by David M. Geltner and Norman G. Miller
• “Property Valuation and Market Cycle” by David Isaac and John O’Leary

Real Estate Basics: Personal Liability Fundamentals Quiz