Recourse vs. Non-Recourse Loans

Recourse vs. Non-Recourse Loans

There are two different kinds of debt recourse and non-recourse.

Recourse debt is when the borrower is personally liable for the entire debt amount, regardless of the collateral or the security that's being offered on the loan. Non-recourse debt just means that the borrower is not personally liable and the banks or the lender's only security is the collateral itself.

But for most loans, recourse or non-recourse doesn't matter. The only time the difference between the two comes into play is in the event of foreclosure. When a lender forecloses, they take the property back and they liquidate the property or sell it to recoup the money that they loaned to the borrower. 


Sometimes when they sell the property, If the property's worth a million dollars and they loaned 800,000, then they have enough to cover the money that they loaned out plus other expenses and costs. But sometimes the property does not stay in value. It goes down in value. And this can happen because of mismanagement of the property or the borrower not having enough funds to maintain it properly. 

There's a lot of different reasons why a property could lose value, but let's say in this example that a property was worth a million dollars and the lender loaned 800,000 on it, but over time, for whatever reason, the property became worth $600,000. 


This difference here between what the property is worth and what the lender is owed is called a deficiency. 


Important to note is that the deficiency isn't just the difference between the loan amount and the property's new value the lender has. In addition to the principle they're trying to recover, they have, they are also owed accrued interest. Legal fees, late fees, and other expenses related to the foreclosure process. 


So in an example like this, that deficiency could very easily be three or $400,000 instead of just $200,000. In a case of a recourse loan, the lender is able to sue the borrower for recovery of the deficiency amount. They can go after other assets or other find other ways to get a judgment in court to recover whatever the collateral did not cover. 


In a non-recourse loan, the lender is not able to go back to the borrower and sue them for the deficiency. The lender has no recourse against the borrower.