Are Your Loans Recourse or Non-recourse, Know the Difference

[Roger Mace]

Recourse and non-recourse loans are two types of financing agreements that differ primarily in the lender's ability to seek repayment beyond the collateral.

Recourse Loan: In a recourse loan, the borrower is personally liable for the debt. If the borrower defaults, the lender can pursue not only the collateral but also the borrower's other assets and income to recover the outstanding amount. This type of loan typically has lower interest rates since it poses less risk to the lender.

Non-Recourse Loans: Conversely, non-recourse loans limit the lender's ability to collect from the borrower beyond the collateral pledged for the loan. If the borrower defaults, the lender can only seize the collateral and cannot pursue further assets. This type of loan is generally considered riskier for lenders, often resulting in higher interest rates.

In summary, the key difference lies in the borrower's liability and the lender's recourse options in the event of default.

[Jay Hinrichs]

of course this is a correct description but lets talk a bout reality.

very few loans for most investors will be non recourse unless they are very large loans

but the average under 1mil loan 97% of the time will be full recourse unless the lender is not ready for prime time.

[Roger Mace]

I can agree for the most part, but I do have a prime-time lender who will consider non-recourse for fix and flip and ground up construction.  It really depends on the lender.

[Chris Seveney]

Quote from @Jay Hinrichs:

of course this is a correct description but lets talk a bout reality.

very few loans for most investors will be non recourse unless they are very large loans

but the average under 1mil loan 97% of the time will be full recourse unless the lender is not ready for prime time.

 The only loans I see non recourse nowadays are those lending to a SDIRA which they have to be non recourse or an unsophisticated private lender. My last W2 we were doing a $400M loan refinance on a $1B+ portfolio of buildings and the loan still had recource on it.  

[Jeff Chisum]

If a DSCR originator (keep in mind you don't need a mortgage license to originate) tells you the loan will not be reported on your personal credit but require you to be a personal guarantor your next request should be; "I want to see in writing it will not be reported on my personal credit". The response you will get is "we don't put it in writing but we just don't report it". Run!

[Patrick Roberts]

Quote from @Chris Seveney:

Quote from @Jay Hinrichs:

of course this is a correct description but lets talk a bout reality.

very few loans for most investors will be non recourse unless they are very large loans

but the average under 1mil loan 97% of the time will be full recourse unless the lender is not ready for prime time.

 The only loans I see non recourse nowadays are those lending to a SDIRA which they have to be non recourse or an unsophisticated private lender. My last W2 we were doing a $400M loan refinance on a $1B+ portfolio of buildings and the loan still had recource on it.  

 Yeah nonrecourse is one of those things that exists in theory but is very, very hard to find in the residential space.

[Jay Hinrichs]

Quote from @Jeff Chisum:

If a DSCR originator (keep in mind you don't need a mortgage license to originate) tells you the loan will not be reported on your personal credit but require you to be a personal guarantor your next request should be; "I want to see in writing it will not be reported on my personal credit". The response you will get is "we don't put it in writing but we just don't report it". Run!

there are definitely states that require MLO licensure to do any loan on a 1 to 4 unit.. about 15 states require it .. the others dont as you suggest.

[Stuart Udis]

@Roger Mace I would be skeptical of a lender who holds themselves out as a  non recourse construction lender. Ordinarily non recourse financing is reserved for larger stabilized assets that are low levered. Even then there’s going to be your customary “bad boy carveouts”. I’m sure the construction loans have completion guarantees beyond the ordinary carveouts so are they truly non recourse?

Also what is the max leverage? For illustration purposes if I were given the opportunity to finance my construction projects at 8O% LTC full recourse or 70% partial recourse I will select the higher levered recourse option because have confidence in my projects knowing the debt is sub 60% LTV and want the benefit of leverage.

I wouldn’t be surprised if it’s  a marketing gimmick to get potential borrowers through the door through  weirdly worded non recourse language that is effectively recourse or by offering such terrible leverage borrowers would rather have the recourse and competitive terms. 

[Jeff S.]

It should also be noted that there is often a difference between the borrower and the guarantor.

If the loan is made to an entity (LLC, corporation, trust, etc.)—as long as it's not to a retirement plan—the lender will almost certainly require a separate guarantee. This guarantor, who may be an individual or another entity, will be responsible for the difference between what is owed to the lender to make them whole and what has been recovered.

If the lender makes the loan to an individual (natural person), this person is implicitly the guarantor via the note, and no separate guarantee is needed. In fact, a personal guarantee would be irrelevant if pursued in this scenario.

This doesn’t happen often, but as lenders, we're leery of doing business with anyone who won’t agree to a guarantee. In our view, it tells us something about their integrity.

[Chris Seveney]

@Jeff S.

Speaking of recourse loans…

https://therealdeal.com/new-york/2024/11/27/acres-goes-after-personal-assets-of-tides-equities-principals/