Non-Recourse Debt

   Non-Recourse Debt

A non-recourse debt is another way to refer to a secured loan which may be backed up against with collateral that the borrower may not personally be responsible for. This is not a sought after loan by any lender as it results in a limited recovery options of the debt in the event of a default. Because of the lack of risk to the borrower most Non-Recourse loans are secured by collateral that may very well be more valuable then the property itself so as to protect the investment the lender is making. Typically this is reflected by a loan to value ratio of around fifty to sixty percent.

In the United States there are a few states which allow Non-Recourse mortgages they are:

  • Alaska
  • Arizona
  • California
  • Hawaii
  • Minnesota
  • Montana
  • Nevada
  • North Dakota
  • Oklahoma
  • Oregon
  • Washington

A Non-Recourse Debt is usually used to finance projects with high expenditures, long loan periods, or uncertain revenue acquisition. These loans can be used for commercial real estate, or shipping. In some states anti deficiency clauses can be added to the contract which allow mortgages to be secured by a personal residence against the borrower.

What is the difference between a Recourse and Non-Recourse Loan?

The clearest difference between a Recourse and Non-Recourse Loan is after a default and when the collateral has been seized and sold. If the total gained from the sale of the property used as collateral does not pay off the debt owed the lender can then pursue other assets owned by the borrower until the debt is satisfied. Whereas, in a Non-Recourse loan the lender has agreed contractually to only take the promised collateral. It is important to note that many non-recourse loans have higher than normal interest rates and may be reserved for businesses or individuals with stellar credit as the lender is taking a much bigger risk then in most types of loans. Another thing to remember is that defaulting on any loan, recourse or non-recourse will still harm a borrowers credit score.