The terms you won’t find in a non-recourse commercial property loan, in addition to the mandatory assigning of the property as collateral, are those that relate to the borrower signing a personal guarantee. Conversely, a “with recourse” loan reflects just the opposite: a borrower personal guarantee is included. In both cases collateralized real estate is the common factor, which simply means in the event of a default the lenders’ first recourse is to take the asset back. The differentiation between the two loan types only becomes pivotal when the lender goes to sell the property to recoup loan principal and any back interest payments plus expenses. If you’re wondering, “What is a non recourse loan?”— you’ve come to the right place.
What is a recourse loan?
A recourse loan is where the borrower agrees to make payments of the unpaid balance of the loan as well as any accrued interest and attorneys’ fees if the borrower defaults on his or her loan. On the other hand, what is a non recourse loan?
A non recourse loan is where the borrower agrees that they will not pay any of the unpaid balance of the loan nor any interest, attorneys’ fees or expenses if the borrower defaults on his or her loan.
What is nonrecourse financing?
A non recourse loan means that in the event of default, meaning if the borrower defaults on his or her obligation to repay the unpaid balance of the loan as well as any accrued interest and attorneys’ fees, then the lender cannot pursue the borrower personally to collect the debt.
So, what is a non recourse loan? Nonrecourse loans are when an asset, for example property, is used as collateral in exchange for a loan. The lender has no claim to any of the borrowers personal assets in case of default, but can only claim repossession of the collateralized asset i.e. the mortgaged property in this case.
Some non recourse commercial real estate loans, including multifamily loans, commercial mortgages, construction loans, and other forms of loan funding, are fully non recourse meaning that if there’s a missed payment or default on the payment agreement then all that is owed in terms of principal and interest will be repaid by liquidating the included collateral (the property). Other types of non recourse commercial real estate loans are partially recourse, meaning they contain provisions allowing lenders to make claims against borrowers outside of the collateral, if say for example a payment is missed.
In addition to collateralized property, there is also a type of nonrecourse loan where borrowers can receive money without having their credit checked or credit history established. In these cases the borrower’s only responsibility is to repay the loan amount with interest and fees as agreed upon in a promissory note.
Where non-recourse loans are used
Non recourse loans are one of the most common types of loans used in commercial real estate investments. An example of a non recourse loan is a mortgage for a house that has been taken as collateral from the borrower. The lender can have no claim to any of the borrower’s personal assets, but only take possession of the mortgaged property. A non-recourse loan allow lenders to take possession of a property if a borrower misses a payment or defaults on the agreement.
Non-recourse loans can also be helpful for the following scenarios/individuals:
- CRE investors recourse
- Real estate investor goals
- Commercial real estate investors (such as a commercial real estate investor looking for real estate loans)
- Other forms of commercial real estate loan financing
Non recourse financing in commercial real estate
When you use a non-recourse commercial property loan, the lender cannot take any of your personal assets. But they can take possession of the property you used as collateral if you miss a payment or default on your agreement.
Commercial real estate loans tend to be non-recourse, meaning the lender can only take possession of the commercial property and they cannot pursue any other assets. This type of loan has been popular for years with investors who purchase commercial property from a seller that demands a large down payment from the buyer.
Non recourse financing is used across many types of personal finance situations, including mortgages and car loans , but it’s especially important in terms of commercial real estate investment. In 1997, research by Wharton University found that 80% of recourses loans were recourse on the borrower’s primary residence while 60% of all non-recourse loans were used on income producing properties.
Recourse vs. non recourse loans
One of the most common requests we receive is to help explain the difference between a recourse vs nonrecourse loan. Recourse loans mean that the lender can take other things that belong to you if you cannot repay the loan, like your home or car. Non-recourse means that the lender cannot take anything else because it is not related to the loan.
A recourse loan is a type of a commercial loan where a lender has a claim on assets that are not tied to the property being mortgaged. These assets can be personal, business or real estate assets. This means that if you cannot repay the loan for any reason, the lender may seize these other assets so recoup some of their losses from your defaulting on the commercial loans .
That’s not the only difference between a recourse vs nonrecourse loan. In addition, lenders have to abide by state laws when it comes to foreclosure proceedings and other items pertaining to non-recourse loans or recourse loans. In most states, foreclosure proceedings must comply with state statues including statutes addressing deficiency judgments. A deficiency judgment occurs when you owe more than your property sells for in foreclosure sale.
What is qualified nonrecourse financing?
Qualified non-recourse financing is a type of financing that is only required to be repaid from the collateral of a loan rather than a borrower’s personal assets. This type of financing is typically used for commercial property investments so if the borrower defaults on their agreement, the lender can only take possession of the property.
In some cases, lenders will have recourse on primary residence, so they can pursue other assets if the borrower misses a payment on a mortgage for example. In most cases, however, qualified non-recourse loans are common in commercial real estate finance and it is usually legal in most states for them to do this.
What is a non-recourse loan?
A non-recourse loan is a type of commercial loan where the lender can only take possession of the property being mortgaged. If the borrower does not repay the loan, the lender cannot take anything else.
How do non recourse loans work?
Now you have a non recourse loan definition, but how do they work?
A non-recourse commercial real estate loan does not provide the lender with any recourse on personal assets. The lender can take possession of the property and other assets if the borrower misses a payment or defaults on their agreement. Non-recourse loans are typically used for commercial property investments and it is often legal in most states.
Non-recourse commercial real estate loans can sometimes be risky for lenders because the lender cannot pursue any other assets if you miss a payment or default on your agreement. In addition, lenders have to abide by state laws concerning foreclosures and other items pertaining to recourse and non recouse loans. It’s important that you check with your state to see what is legal and recommended when it comes to this type of financing.
What is a recourse loan? A recourse loan is a type of commercial loan where the lender has a claim on other assets in case you default on your agreement . You could forfeit personal, business or real estate assets if you cannot repay the loan for any reason.
Non recourse loan rates
A non-recourse loan rate is the interest rate you get on a commercial property if you are using qualified non-recourse financing. This type of financing is generally for investing in commercial property because it gives the lender no recourse on other assets. Non-recourse loans are risky for the lender because they can only take possession of the property if you miss a payment or default on your agreement. As such, non recourse loan interest rates can sometimes be higher.
Non recourse commercial lenders
Using a mortgage broker is an excellent way to find non recourse commercial lenders from one unified location. We’ll provide you with access to the top commercial lenders for both recourse and non recourse financing for any commercial project.
Who qualifies for non-recourse financing?
A qualified non-recourse financing is a loan that a lender can take a deficiency action if a borrower defaults. Consequently, the lender will only be able to take execution for any security that was provided to them. The following are some qualities of a qualified non-recourse financing:
- The borrower must have been in possession of the secured property at the time of default.
- The borrower must have been in possession of collateral other than the property at the time of default.
- There must not be any significant timing difference between when the loan was made and when the secured property was transferred.
- There must not be any significant difference in the value of secured property at the time it was transferred.
The following are some qualities that disqualify a non-recourse financing:
- The borrower does not have possession of the security or other collateral for the loan at the time of default. This includes instances where there is no longer anything to take execution on. For example, if someone defaults on their home mortgage and they move out before foreclosure proceedings are complete, no deficiency action can be taken unless they were still living in it at the time of foreclosure sale because there will be nothing left to take.
- There is a substantial timing delay between when the loan was made and when the security was transferred into account for risk premium
Qualifying for non-recourse financing
Want to qualify for non-recourse financing and the highest quality non recourse commercial loans? You’ll need to meet certain needs, including creditworthiness. Our broker team can help you determine exactly the qualifications you’ll need to meet.
Where to obtain a non-recourse loan
The best place to obtain a non-recourse loan is through a qualified broker such as Clopton Capital, who can help link you up with the best possible lenders.
How to get a non recourse loan
Wondering how to secure a non-recourse loan? You’ve come to the right place. We’ll work with you based on your specific needs to find the right loan and terms.
Contact Clopton Capital to discuss our non-recourse commercial loan options
Clopton is a national commercial mortgage broker specializing in non recourse commercial loans that gives our clients looking to borrow from $1 million – $40 million on-demand access to the most competitive commercial non-recourse lenders in the business. We offer customized loan solutions for all types of commercial real estate transaction types where personal guarantees do not enter the conversation.
When you apply through us we will do our due diligence before deciding to underwrite but once decided we’ll set you off on the non-recourse loan track straight away. It will make a huge difference to your peace of mind over the long run. What better formula is there than the best rates in the business, no compromise on standard redemption terms, fast approval, and zero worrying about your personal liability?
To understand more about non-recourse loan options, contact one of our commercial mortgage lenders by calling 866-647-1650 or using the Contact Us form available from the menu. We’re always happy to work with investors to find the right non-recourse commercial loan rates and repayment plans to suit your needs. And with low closing costs attached to a straightforward documentation and underwriting process, your commercial non-recourse loan process will be stress-free.
Non-recourse loan illustrative example
A lender is owed $2 million at the time of a property foreclosure.
After retrieving the property, the lender sells it for only $1.5 million incurring a $500k deficit on the advance to the borrower.
In a recourse loan: the lender can look to the “with recourse” borrower to make up the difference based on its/his/her personal guarantee.
In a non-recourse commercial loan, as is the case with all non recourse commercial loans: the non-recourse lender would have no such remedy.
Exception: Even with a non-recourse loan there may be instances where a personal guarantee could be triggered – commonly referred to as recourse carve-outs or bad-boy carve-outs. These are typically instances where fraud, theft, misrepresentation, etc. have played a role in the lender’s misfortune with the real estate.
Non recourse commercial loans FAQ
What is a non-recourse commercial loan?
A non-recourse loan is a loan that does not have a personal guarantee from a borrower. Instead, a lender will focus their efforts on recovering the amount due from the assets that were used as collateral for the loan.
How do you qualify for a non-recourse loan?
To qualify for a non-recourse loan, you’ll need to meet certain creditworthy requirements.
What are non-recourse loans?
Non-recourse loans protect borrowers from lenders pursuing their personal assets in the event that they’re not able to pay off their loan.
Which banks offer non-recourse loans?
A range of banks offer non-recourse loans, though not all. We’ll help you find the right non recourse loan lenders. Non recourse lending could be the perfect path for you.
Contact Clopton to discuss our non-recourse commercial loan options
To understand more about non-recourse loan options, contact one of our commercial mortgage lenders by calling 866-647-1650 or using the Contact Us form available from the menu. We’re always happy to work with investors to find the right non-recourse commercial loan rates and repayment plans to suit your needs. And with low closing costs attached to a straightforward documentation and underwriting process, your commercial non-recourse loan process will be stress-free.