Choosing between non recourse loans and secured loans

In a recourse loan, the lenders normally have the upper hand since they are allowed to seize other personal assets should you default on your loan and the secured property proves insufficient to pay off the loan. This means bigger risk on your part, the borrower, compared to a non recourse loan. In a non recourse loan, you will get the financing you need without fear that the lender will hold you personally accountable for your debt. Since non-recourse financing typically requires  collateral, the purchased property serves as collateral for the loan. Non recourse lenders can only seize the collateral if you default on your loan. In case the value of the property as collateral is not enough to cover the loan, the lender will not be allowed to attach your personal assets or income.

Non recourse financing considerations

A non recourse loan is not completely without risk. Although this loan is considered low-risk on the part of the borrower, non-recourse loans should not be regarded as no-risk transactions. Some non-recourse lenders offer what is known as limited-recourse financing. This non-recourse loan comes with very specific conditions; and if these conditions are not met the lender will be allowed to go after your personal assets to fulfill the obligation. 

Non recourse loan rates also tend to be higher then secured loans, due to the higher risk nature, on the part of the lender.  The value of the collateral may fall or rise according to market conditions. In order to reduce that risk, lenders do not allow you to borrow the full amount on the property; generally only up to 80% to 90% loan to value amount may be borrowed.

Making the choice

If you choose non recourse financing therefore, it is important that you understand any conditions associated with the transaction and the additional costs, compared to regular secured loans. In applying for a retail loan, you always have a choice between secured loans or non-recourse loans. Nonetheless, non recourse financing in itself is already a broad concept, and not all types of non recourse loans are offered in the same terms or at the same rates. Choosing a good lender will help you make a better decision, based on your credit worthiness, existing properties for collateral, and finally your need for sufficient financing.

The difference between a non recourse loan and a recourse loan

A non recourse loan is different from a typical loan, wherein the borrower is held personally liable for the debt. With a non recourse loan, the lender can only seize the collateral pledged for the loan; and is not allowed to go after the personal assets of the borrower. In the event that the value of the property is not sufficient to cover the entire value of the non-recourse mortgage, the borrower does not become personally liable for the loss. In contrast, recourse loans hold the borrower liable for the debt, allowing the lender to go after the borrower’s personal assets.

The broad concept of non recourse financing

Non recourse financing as a concept provides financing for those types of projects where the borrower has insufficient secondary collateral to qualify for a traditional recourse loan, or where the borrower has excellent credit and/or high net worth to mitigate the risk inherent in an non recourse loan. Government agencies also offer non recourse financing in order to stimulate housing development for low income families, or senior citizens. Non recourse financing is usually not offered where other forms of financing are readily available.

Non recourse loans do not mean no risk

Although a non recourse loan poses lesser risk to the borrower, these types of loan do not necessarily mean no-risk. Less risk is not synonymous with no-risk, since all forms of loans or debt do carry some form of risk. Since the loan is of a non recourse nature, these non-recourse lenders will consequently find other types of credit guarantees to lessen their assumption of risk. Also these lenders may charge higher interest rates than usual, especially compared to most secured loans. Furthermore, it’s very rare for these lenders to allow 100% borrowing on the value of the property or collateral. At most you can only borrow up to 80 to 90 percent on the allowable loan amount.

While these non recourse loans are ideal for new construction and other infrastructure projects, knowing more about their associated risks will help you form realistic expectations, so you end up choosing the right financing for your real estate projects.

Non recourse financing for new multifamily construction

This type multifamily financing is available to borrowers who are planning on the construction of a multifamily property. These may include apartments, condominium complexes, or assisted living facilities. Most lenders will allow you to borrow 90% of the cost of construction, for a 40 year amortization or 40 year term. When obtaining this type of non recourse financing it is best for you to check whether there is a maximum loan amount. If the maximum loan amount is not enough to cover the cost of construction, you might want to check out other multifamily lending programs.

Multifamily non recourse loans for property acquisition

If you’re planning to acquire an existing multifamily property and need financing to do so, you can always go for multifamily non-recourse loans for property acquisition. The loan amount may vary although most lenders offer 85% to 90% loan to value financing. This type of non-recourse financing for multifamily acquisition is also assumable, making the property easier to sell during less than favorable circumstances.

Non recourse loan for multifamily refinance

Non-recourse lenders also offer multifamily refinancing to qualified borrowers. These refinancing offers often have a fixed term, and a loan to value percentage of 80 to 90 percent. Since these loans are non recourse, the borrower is not personally liable for the debt. The lender can only go after the multifamily property held as collateral if you are unable to pay off the debt for any reason. Furthermore most of these loans are also assumable, so that selling the multifamily property in the future is easier.

Non recourse loans for multifamily rehabilitation

If you are looking to purchase a multifamily property that necessitates substantial rehabilitation, you may take out a non recourse loan for property rehabilitation. The set-up is similar to that of a loan for multifamily construction; however in this case, you will be financing the rehabilitation on an existing property. Many lenders offer these types of non-recourse mortgage with varying terms, maximum loan amounts, and non recourse interest rates. There are also lenders which offer these loans on negotiable pre-payment terms, so you end up paying less on your monthly amortizations.

Multifamily non recourse loans are not offered merely for the purchase or acquisition of a multifamily property. You may also use them for rehabilitation or substantial refinancing. After making sure that you’ve chosen a reliable lender, you can start reviewing the many multi family recourse loans available for your specific financing needs.

Not affected by market volatility

First of all, non recourse loans issued by the government are not easily affected by market volatility. Since the government provides funding for these lending activities, these loans are more readily available and are easier to apply for. Many private lenders limit their lending activities during times of economic recession, and as a result many loan or mortgage applications are declined. Non-recourse financing by the government, on the other hand, is more stable and more secure. Since funding is more readily available, getting the financing you need is often a less complex process.

Lower non recourse loan rates

Compared to private lending, government non-recourse loans tend offer lower rates. Most commercial lenders like banks need to make profits from their financing activities and therefore charge higher rates than public lenders. In contrast, government financial institutions charge lower rates so that more borrowers can take advantage of more affordable financing. Lower rates translate to lower monthly payments. These long range benefits make government loans an attractive option for many borrowers.

Ideal for mortgages

A non recourse loan is normally taken out in the form of a mortgage, since the property serves as the collateral and the borrower does not become personally liable for the debt. A government non-recourse mortgage has a lower interest rate as well, making them more attractive for borrowers. Whether you’re looking to refinance an existing mortgage or to acquire a new property, for profit or non-profit purposes, choosing a government financed or guaranteed loan can be very advantageous.

Quicker approvals

Since government lenders do not exist merely to make profits but also to serve the public, many government non recourse lenders are quick to process and approve loan applications. Most private lenders take weeks or months to process loan applications in order to assess the risk involved in every transaction. These private non-recourse lenders check your credit history and establish your credit worthiness as well. This makes the entire process more intricate compared to a non recourse loan from a government lender. A quicker approval time allows you to start on your project as soon as possible, whether for commercial or non-commercial purposes.

As a borrower you will have two choices when it comes to taking out a non recourse loan. You may choose to go for a private lender or a government agency. Although the choice is ultimately up to you, reviewing these advantages on government non recourse loans will lead you to make a smarter choice in the end.

Non recourse financing has less liability

Compared to a recourse loan, non-recourse loans place no liability on the part of the borrower. In a recourse loan, collateral is not the only requirement. You are held personally liable for the loan. In case of default, the lenders have the right to seize your property or any other asset you may have under your name, to recoup the money you owe them. Non recourse lending however is entirely different. In the event of a default, the lenders can only go after the collateral you have pledged on the loan. Whether the property has increased or decreased in value, the only resort available to the lenders is to foreclose on the collateral property and not on any of your personal assets.

Non recourse loans require collateral

In a non recourse loan, collateral is a huge factor. The value of the financing cannot exceed 90% of the appraised value of the collateral. Developers who plan on putting up an assisted living business, for example, may declare the business property or the building as collateral on the mortgage, provided that the property appraises in accordance with the loan requirements.

In the case of most recourse loans, approval is possible without collateral. The fact that recourse loans are easier to apply to makes them a popular choice for many borrowers. One clear disadvantage to these types of loans, in contrast to non recourse loans, is the ability of the lenders to hold you personally liable on your debt. If you default on your loan or your mortgage, your lender has the option to attach your personal assets or your business as a means to fully pay the outstanding debt.

Better non recourse loan rates

You can also take advantage of better rates from non recourse lenders. Although a recourse loan may offer a lower interest rate, some non-recourse lenders do offer attractive rates to those who have excellent credit history. Shopping around first for the best non recourse loan deals will help you take advantage of lower APRs or Annual Percentage Rates.

The fact that a non recourse loan requires collateral makes them highly suitable for mortgages. In an assisted living non recourse loan therefore, the business property can serve as collateral for your business. There is no need for you to secure another property as collateral for the loan. Assuming that you pass all other requirements for the financing program, a non-recourse loan can help you finance your project with lower personal risk.

Whether you’re trying to get refinancing for your apartment building or you intend to acquire an assisted care facility or nursing home, government non recourse loans can provide you with the financing that you need. Compared to non-government lenders, these types of loans are more readily available despite market volatility. These loans are offered by the federal government and are administered through the FHA or the Federal Housing Administration.

Where a federal non recourse loan may be used

There are many uses of a government funded non recourse loan. Whether you’re looking into a property for profit or non-profit purposes, non recourse loans can help you in the acquisition, new construction, refinancing, or rehabilitation of a property.

This type of financing may be used for the new construction of multifamily home parks, apartments for profit or non-profit use, nursing homes and assisted living facilities, and acute care facilities or hospitals. These government loans may also be used in the rehabilitation of apartments, rehabilitation of immediate care homes, and expansion or rehabilitation of nursing homes and senior citizen housing facilities. Non-recourse loans from the government are also used for refinancing purposes. These may be used to refinance existing mortgages, in order to lower interest rates and other associated costs.

Further information on the non recourse financing

Non recourse financing is a type of financing wherein the borrower is not held personally liable for his or her debt. Normally this type of financing is in the form of a mortgage. The property serves as collateral or security for the loan. A non-recourse mortgage may be taken out through commercial lenders or through government financial agencies. Since you will not be signing as a guarantor on your mortgage, the risk and liability is reduced. Whether you plan on refinancing an existing property, acquiring a commercial facility, or rehabilitating an apartment complex, a government non recourse loan can provide you with the financing that you need.

The attraction of government loans

Government non recourse lenders have their unique advantages compared to most private lenders. Most private lending agencies are normally affected by market volatility and may not be able to offer the best financing terms. During a recession, for example, private lenders may have to limit their lending facilities, and will have to raise interest rates to recoup their losses. However, in the case of government-assisted lending, market volatility poses a very minimal risk. Thus, it will be easier for you to obtain the financing you need, no matter what the current economic environment is.

It is important however to learn more about non-recourse lenders prior to your actual application. Some lenders may offer more attractive non recourse loan rates than others, or they may offer you a better over-all deal. Government loans do have their advantages, especially during times when unpredictable market changes occur. Since these loans are non-recourse, investment risk is minimized.