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Non-recourse vs. recourse loans are two general categories often used when shopping for a real estate loan. There are, of course, many factors to consider when getting a loan, either for a home or a commercial property. Factors such as the comfort level with the lender, the amount that can be afforded reasonably, and interest rates are all important. However, one of the most important decisions is whether to go with a non-recourse or recourse loan.
There are positives and negatives on both sides of non-recourse vs. recourse loans. Read on to learn what each type of loan involves in order to better determine which is the right choice for you.
It’s important to understand the differences between non-recourse vs. recourse loans in order to determine which is best suited for an individual.
Non-recourse loans are riskier for lenders, which means they are more difficult to qualify for and carry higher interest rates.
Recourse loans are riskier for buyers but they offer lower interest rates.
What are Non-Recourse Loans?
Non-recourse loans are most favorable to borrowers because they put the majority of the risk and responsibility on the lender. If a borrower defaults on a non-recourse loan, the lender is only able to take the asset (property) used as loan collateral, nothing else. If the property happens to decline in value, or if there are major fundamental issues with the property, it becomes the burden of the lender, often as a loss to them.
For example, if an individual takes out a non-recourse mortgage on a home and defaults on the payment, the lender can seize the home. If the home has declined in value, it is the lender’s loss.
Two important things to know about non-recourse loans: they are harder to obtain and they come with higher interest rates than recourse loans. This is the case because non-recourse loans are riskier for the lender. When pursuing a non-recourse loan, know that it’s important to have strong financials and an impressive credit score.
What are Recourse Loans?
Recourse loans place the majority of the risk and exposure on the borrower. If the borrower defaults, the lender may seize the property covered by the loan AND go after the borrower’s other assets and financial accounts to recover any additional debt.
Let’s take the same example from above. If an individual defaults on a recourse mortgage, the lender may seize the home. The lender may also go after any other sizeable assets the individual owns and even take money from the borrower’s bank accounts to recover any remaining debt. If the individual does not own any other assets or accounts, the lender may even be able to garnish the borrower’s wages until the debt’s been repaid.
Recourse loans are, however, easier to come by and qualify for, and they typically offer lower interest rates.
CFI offers the Commercial Banking & Credit Analyst (CBCA®) certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
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