The Main Guest appears at the background of the woods in the 7th 'House' level and gets closer as you progress. However, the Main Guest is only seen in 'House' levels and in 'Eye' levels background stays normal all the time.
The Main Guest is presented as one of two following entities: a monster creature that looks a lot like a hybrid of moose and goat, or the girl from the woods. The girl only appears if you got 6 reality fragments otherwise the monster shows up. The girl can replace the monster during the game and it happens if the player manages to find 6 reality fragments.
The Main Guest mostly determines the ending* you are going to get. The monster means that you are going to get the 'Stuck' ending. The girl means that you are going to have the 'Breaking the Circle' ending. 'Game Over' is not determined by the Main Guest but by the player's skill level and luck.
From the moment when the Main Guest appears the second part of the game starts. In the 7th 'Eye' level (level right after the Main Guest's appearance) the Lodger states that he has no more time to spend in his 'dreams' (not prooved that 'Eye' levels are the dream ones) because 'it's getting closer in the real word'. From there on the player has to be much more carefull though he/she has to be faster as well. All this is needed because the second part of the game brings in such thing as 'sanity bar' (white lightning-alike crack which gets smaller as the character loses sanity). The sanity just decreases over time and collisions with Guests does not affect it, except that you will have to survive for a longer time, therefore your sanity will be lower by the end of the level. The sanity is not being wasted during 'House' levels.
*As it was mentioned by one of the creators of the game on an interview, 'Knock Knock' doesn't have neither good nor bad endings.