A non-recourse loan is a loan where the borrower is not personally liable for the debt beyond what the collateral named in the loan covers. If the borrower defaults on payments, the lender can not go after assets, income, or other methods of repayment even if the collateral does not cover the remaining balance of the loan.
A recourse loan, on the other hand, is a loan where the lender can take legal action to seize assets above and beyond the named collateral on the loan.
Qualifying For a Non-Recourse Loan
Non-recourse loans are not offered as often as recourse loans because of the increased risk to the lender. The down payment is usually significant, sometimes up to 40% of the loan's value. A non-recourse loan will also likely have a higher interest rate, and the collateral will also need to be of a higher value than might be required in a recourse loan.
A recourse loan will usually have a lower interest rate, and sometimes a lower down payment requirement because the lender is taking less risk in the case of default.
To qualify for a non-recourse loan, the borrower will need to have an excellent credit score and have a steady income. The collateral will usually need to be a higher value than in a recourse loan.
There is also collateral involved with a recourse loan, but the lender has the ability to legally go after the borrower’s other assets to cover the rest of the loan. This includes suing the borrower to have wages garnished.
Every lender has different qualifications for real estate collateral but considerations might include the year built, location, and whether it is the borrower's main residence. The collateral is designated during the loan approval process.
Is a Mortgage a Non-Recourse Loan?
Recourse loans are used more frequently than non-recourse loans because they usually present less risk to the lender. Mortgages are generally recourse loans, with the exception of 12 states where home mortgages are considered non-recourse loans.
For example, let’s look at a defaulted non-recourse mortgage. If the loan has a balance of $250,000 but the lender is only able to recover $150,000 from the named collateral, the additional $100,000 cannot be recouped from the borrower. In a recourse loan, the lender can legally pursue repayment.
However, as with any loan, defaulting on a non-recourse loan will probably have a negative impact on the borrower’s credit report.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
