Among the most attractive financing options for the new construction of properties are new construction non recourse loans. Due to their “non recourse” nature, the lender will have no recourse on the borrower’s personal assets, Many property developers choose to take up this form of financing. However non-recourse financing does not necessarily mean no risk. Here are some of the facts on non-recourse loans which you might want to know more about.

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.