Recourse vs Non-Recourse Loans

What do you need to know about recourse vs non-recourse? Pretty simple actually. A recourse loan means that while the loan is secured and held in your entity name (LLC for example) you have signed a personal guarantee ensuring that in the event of default the lender could come back to you personally to be made whole if the collateral is not withstanding enough value to cover the mortgage debt and/or legal costs etc. The flip to that is no personal guarantee require, non-recourse. Non-recourse will come with higher rates or shorter terms *less skin in the game.

Additionally, when we consider between recourse and non as it might relate to conventional loans and those underwriting conditions a lot of people are not aware that per definition Fannie/Freddie determines what counts against the 10-loan limit per qualified individual is any residential property (SFR to 4 unit) that has a mortgage in the individual’s name OR personally guaranteed by that person. Most people assume that b/c they have a commercial loan written to the LLC it doesn’t count against that 10. Not true. Only the non-recourse commercial loans make that condition true.

Lastly- and please note this is my personal observation and is not commented as legal advice; In my 27-year career as an investor and lender who focuses on investor’s needs, I have yet to see a recourse commercial loan come back and attach the individual or their assets. That is not to say it hasn’t/doesn’t happen, but such an occurrence has never crossed my desk. In the event of default, the lender just wants the property back- as quickly as possible.

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