Non Recourse Loans Vs. Recourse Loans?

The primary difference between recourse and non recourse loans is liability to the borrower. The lender‘s goal is to minimize loss risk as much as possible, and as such wants as much security as he can get. Increased risk translates into higher cost, which is borne by the borrower. The higher cost of a non recourse loan translates either into higher interest rate on the debt, smaller loan to value ratio, or more assets at risk.

Which is better (our opinion)? There is not a simple answer to this question. A non recourse loan is ideally suited to a commercial property that is rented where the borrower has no control over the business activities of the tenant. Should the business tenant default on his rent payments such that the borrower is unable to make the mortgage payments, the lender can only foreclose on the tenanted property.

During times of economic prosperity and stability, non recourse loans are less relevant. Property values increase, so even if a default on the debt occurs, the property can be sold and the proceeds more than likely will cover the balance of the loan. However, during periods of economic downturns and market weakness, non recourse loans become much more important than recourse loans when considering a purchase or refinance.

Non Recourse States

Some states are known as non recourse loan states. By statute lenders cannot seek judgment against the borrowers. In other states, lenders are allowed to sue for the difference between the market value and the non recourse loan.

Other states are deemed to be non recourse states, even though they are legally recourse states. In those states, the lender has the option to foreclose or sue the borrower for difference between the market value and the value of the loan, but not both. It is more efficient and less costly for the lender to foreclose, so unless the borrower has substantial assets beyond the lien property amount, the lender is more likely to foreclose.

IRA Non Recourse Loans

There are lenders in all 50 states who will issue a non recourse loan if the borrower has 30% of the purchase price of the property in a self-directed IRA. Net revenue from the investment property must exceed the loan payments by at least 20%. This will determine the maximum value of the non recourse loan and as such, the down payment required. Restrictions apply as to the type of property that qualifies for a non recourse loan under this program, so check with your lender and tax specialist before you proceed.