Non-Recourse

What does non-recourse mean?

Non-recourse refers to a type of loan agreement where the lender can only look to the collateral pledged as security for the loan in case of default, and not to the borrower personally, for recovery of the debt. This means that in the event of default, the lender cannot seek payment or recovery from the borrower's personal assets or income.

Non-recourse loan interest rates

Non-recourse loans are typically priced at a higher interest rate than recourse loans in order to compensate the lender for accepting less security of principal. Lenders may also require a higher DSCR in order to qualify for a given loan-to-value or LTV.

Are DSCR loans non-recourse?

Not all DSCR loans are non-recourse. In fact, most private lenders require or strongly prefer full recourse. Loan programs that are non-recourse commonly include a pledge of shares agreement and bad boy carve outs.

1 - 4 Unit DSCR Loans

Most DSCR loan programs for 1-4 units require full recourse. This means that at least one member of the borrowing entity, typically an LLC, serves as a personal guarantor for the life of the loan.

Portfolio DSCR Loans

Portfolio DSCR loans of 2 or more 1-4 unit properties can be either full recourse or non-recourse.

Multifamily DSCR Loans

Likewise, multifamily DSCR loans for 5+ unit properties can be either full recourse or non-recourse.

Ultimately, whether a loan is recourse or non-recourse depends on the type of loan and the risk tolerance of the lender and borrower.

The terms of the loan agreement will determine whether a DSCR loan is recourse or non-recourse, and the decision will depend on various factors, including the creditworthiness of the borrower, the type of collateral pledged as security, and the lender's risk tolerance.

What's the difference between recourse and non-recourse loans?

A recourse loan is a type of loan or financing agreement where the borrower is personally liable for repayment of the debt, and the lender has the right to seek repayment from the borrower's personal assets or income in the event of default. This means that the lender has a claim not only on the collateral pledged as security for the loan, but also on the borrower personally.

A non-recourse loan, on the other hand, is a type of loan where the borrower is not personally liable for repayment of the debt in the event of default. The lender's only remedy in the event of default is to foreclose on, or seize, the collateral pledged as security for the loan, and not to seek repayment from the borrower personally.

In general, non-recourse loans are considered to be less risky for the borrower, but they also typically come with stricter terms and higher interest rates to compensate the lender for the increased risk.

Are fix and flip loans non-recourse?

While it depends on the lender, most fix and flip loans are recourse and therefore require a personal guarantor.

Why do lenders require personal guarantee?

Lenders require a personal guarantee from borrowers as a way to secure their investment in case of default on a loan. A personal guarantee is a commitment from the borrower to repay the debt using their personal assets or income if the borrower's business is unable to repay the loan.

Lenders ask for personal guarantees because it provides them with added protection and security in the event that the borrower's business is unable to repay the loan. This helps the lender to recover their investment even if the borrower's business fails or goes bankrupt. Personal guarantees also give lenders a way to enforce repayment if the collateral pledged as security for the loan is not sufficient to cover the debt.

In general, lenders require personal guarantees when the borrower has a limited credit history or when the loan amount is large and the collateral is inadequate to secure the debt.