Learn more about real estate loan types
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Non-recourse vs. recourse loans are two general categories often used when shopping for a real estate loan. There are, of course, many factors to consider when getting a loan, either for a home or a commercial property. Factors such as the comfort level with the lender, the amount that can be afforded reasonably, and interest rates are all important. However, one of the most important decisions is whether to go with a non-recourse or recourse loan.
There are positives and negatives on both sides of non-recourse vs. recourse loans. Read on to learn what each type of loan involves in order to better determine which is the right choice for you.
Summary
- It’s important to understand the differences between non-recourse vs. recourse loans in order to determine which is best suited for an individual.
- Non-recourse loans are riskier for lenders, which means they are more difficult to qualify for and carry higher interest rates.
- Recourse loans are riskier for buyers but they offer lower interest rates.
What are Non-Recourse Loans?
Non-recourse loans are most favorable to borrowers because they put the majority of the risk and responsibility on the lender. If a borrower defaults on a non-recourse loan, the lender is only able to take the asset (property) used as loan collateral, nothing else. If the property happens to decline in value, or if there are major fundamental issues with the property, it becomes the burden of the lender, often as a loss to them.
For example, if an individual takes out a non-recourse mortgage on a home and defaults on the payment, the lender can seize the home. If the home has declined in value, it is the lender’s loss.
Two important things to know about non-recourse loans: they are harder to obtain and they come with higher interest rates than recourse loans. This is the case because non-recourse loans are riskier for the lender. When pursuing a non-recourse loan, know that it’s important to have strong financials and an impressive credit score.
What are Recourse Loans?
Recourse loans place the majority of the risk and exposure on the borrower. If the borrower defaults, the lender may seize the property covered by the loan AND go after the borrower’s other assets and financial accounts to recover any additional debt.
Let’s take the same example from above. If an individual defaults on a recourse mortgage, the lender may seize the home. The lender may also go after any other sizeable assets the individual owns and even take money from the borrower’s bank accounts to recover any remaining debt. If the individual does not own any other assets or accounts, the lender may even be able to garnish the borrower’s wages until the debt’s been repaid.
Recourse loans are, however, easier to come by and qualify for, and they typically offer lower interest rates.
More Resources
CFI offers the Commercial Banking & Credit Analyst (CBCA®)certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
FAQs
There are two types of debts: recourse and nonrecourse. A recourse debt holds the borrower personally liable. All other debt is considered nonrecourse. In general, recourse debt (loans) allows lenders to collect what is owed for the debt even after they've taken collateral (home, credit cards).
What is an example of a recourse loan? ›
Most automobile loans are recourse loans. If the borrower defaults, the lender can repossess the car and sell it at fair market value. This amount may be less than the amount owed on the loan because vehicles depreciate significantly in their first couple of years.
What are the disadvantages of a non-recourse loan? ›
Non-recourse loans are riskier for lenders, which means they are more difficult to qualify for and carry higher interest rates. Recourse loans are riskier for buyers but they offer lower interest rates.
Is SBA loan recourse or nonrecourse? ›
Will there be nonrecourse? Or collateral needed for this loan? SBA has no recourse (or will demand compensation or payment) against individuals, shareholders, members, or partners of an eligible recipient unless the 'covered loan' proceeds are used for unauthorized purposes (see above).
What are the benefits of a non-recourse loan? ›
The primary benefit of non-recourse loans is that they provide a greater degree of protection for the borrower. Without a personal guarantee, the lender cannot seize the borrower's personal assets if they default on the loan.
Are Fannie Mae loans nonrecourse? ›
Fannie Mae and Freddie Mac loans are non-recourse which means in the event of default the borrower is not personally liable for further compensation if the debt is not repaid.
Does a partner get basis for nonrecourse debt? ›
Thus, when a partnership liability is nonrecourse but is owed to a lender (or guarantor) affiliated with a partner, the partner affiliated with the lender (or guarantor) is treated as having 100% of the economic risk of loss and is allocated all of the liability for basis purposes.
Is a non-recourse loan taxable? ›
Non Recourse Loans Are Not Taxable
Non-recourse loans are treated differently by the IRS. When debt is forgiven or canceled, that amount will not be taxed. Essentially, you are free from any potential taxes from a non-recourse loan defaulting.
What is a qualified nonrecourse debt? ›
(B) Qualified nonrecourse financing For purposes of this paragraph, the term “qualified nonrecourse financing” means any financing— (i) which is borrowed by the taxpayer with respect to the activity of holding real property, (ii) which is borrowed by the taxpayer from a qualified person or represents a loan from any ...
Is an FHA loan a non-recourse loan? ›
The benefit to the lender is that the loan is insured by FHA. The benefit to the borrower is that the loan is at a fixed interest rate, often lower than conventional rates, and is non-recourse.
The main advantage of non-recourse loans is that they offer the guarantor protection from personal liability. The borrower's personal assets are secure in the event of foreclosure. The lender will not recover their money if the assets are liquidated, and the carve-out guarantee isn't violated.
Are you required to repay a non-recourse loan? ›
You are not required to repay a non-recourse loan if you lose your case. You are only required to repay a non-recourse loan if you settle or win your lawsuit.
How do I know if my loan is recourse or nonrecourse? ›
According to the Internal Revenue Service (IRS), recourse debt holds the borrower personally liable for the repayment of the debt. All other debt is considered non-recourse. That includes the pre-settlement legal funding that High Rise Financial offers.
What liabilities would be considered nonrecourse? ›
There are generally two types of nonrecourse liabilities: 1. Unsecured liabilities. 2. Secured Liabilities, such as automobile loans, that are secured by property.
Is a car loan recourse or nonrecourse? ›
Credit cards, auto loans and hard money loans—typically short-term real estate loans offered by non-bank lenders—are common types of recourse loans. In the case of default, the lender can repossess the vehicle or items purchased with the loan (collateral) and sell them to recoup the outstanding loan balance.
What is recourse and non-recourse factoring with example? ›
Recourse factoring is the most common and means that your company must buy back any invoices that the factoring company is unable to collect payment on. You are ultimately responsible for any non-payment. Non-recourse factoring means the factoring company assumes most of the risk of non-payment by your customers.
Is a reverse mortgage a non-recourse loan? ›
Reverse mortgages are “non-recourse” loans, which means that if you default on the loan, or if the loan cannot otherwise be repaid, the lender cannot look to your other assets (or your estate's assets) to meet the outstanding balance on your loan.
