Quick overview

When a borrower defaults, the loan’s recourse status decides how far a lender can go to recover losses. With a non-recourse loan, the lender’s recovery rights are generally limited to the secured collateral (for example, the property). With a recourse loan, the lender may pursue the borrower’s other assets or income to make up any shortfall after the collateral is liquidated.

This distinction affects risk allocation, negotiation leverage, tax outcomes, and how lenders underwrite loans. In my 15+ years advising borrowers and reviewing loan documents, I’ve seen the loan’s recourse terms drive major decisions for investors and homeowners—especially in downturns.

(For basic consumer protections and foreclosure information, see the Consumer Financial Protection Bureau: https://www.consumerfinance.gov.)

How each loan type works in practice

Non-recourse loans

  • Lender recovery is generally limited to the collateral pledged for the loan. If that collateral is sold and there’s a shortfall, the lender typically cannot sue the borrower personally for the difference.
  • Common uses: commercial real estate financing, certain types of construction loans, and some specialized investment property loans. Many institutional or private lenders will make non-recourse loans to experienced investors with strong equity positions.
  • Pros for borrowers: limits personal liability, simplifies risk management, and makes walking away from an underwater asset a clearer option in some cases.
  • Cons: non-recourse loans often come with higher interest rates, larger down payments, stricter underwriting, and more covenants.

Recourse loans

  • Lenders can pursue the borrower personally for any deficiency that remains after the collateral is sold. That pursuit can include deficiency judgments, levies against bank accounts, wage garnishment, or placing liens on other property.
  • Common uses: most consumer unsecured loans (credit cards, personal loans) and many residential mortgages in a number of U.S. states are recourse or effectively so via deficiency judgments.
  • Pros for borrowers: they can be easier to obtain and sometimes carry lower rates since lenders have greater protections.
  • Cons: increased personal exposure and the risk of longer-term financial consequences after default.

Legal mechanics: deficiency judgments and state law

Whether a lender can obtain a deficiency judgment (i.e., sue for the difference after foreclosure) depends on loan terms and state law. Some states bar deficiency judgments after a nonjudicial foreclosure or limit them under certain circumstances; others allow them. For example, California has anti-deficiency protections for purchase-money mortgages in many situations, while other states are more lender-friendly.

Always check local law and the mortgage or loan agreement. In practice, whether a lender pursues a deficiency often depends on the borrower’s ability to pay and the lender’s cost-to-collect.

(For state-specific foreclosure rules, consult state statutes or a local attorney; CFPB guidance on foreclosures is a useful starting point: https://www.consumerfinance.gov/consumer-tools/.)

Tax considerations you should know

Tax rules treat recourse and non-recourse loans differently after a foreclosure or debt settlement. Generally:

  • Recourse debt: If a lender forgives a deficiency (the remaining balance owed after collateral sale), the forgiven amount may be treated as cancellation of debt (COD) income and taxable to the borrower unless an exclusion applies (e.g., insolvency, bankruptcy). Lenders may issue IRS Form 1099‑C. (See IRS guidance on cancellation of debt and tax consequences: https://www.irs.gov/taxtopics/tc431.)
  • Non-recourse debt: A foreclosure or transfer of the property in satisfaction of a non-recourse debt is generally treated as a sale of the property for tax purposes. The borrower recognizes gain or loss based on the sale proceeds, not on a forgiven deficiency—there typically is no COD income because the borrower was not personally liable.

Tax law is complex and fact-specific. I strongly recommend consulting a tax professional before assuming any tax treatment.

Real-world examples — practical insights

Example 1 (non-recourse): An investor finances a commercial building with a non-recourse loan. When rents fall and the property value drops, the investor surrenders the asset through foreclosure. The lender takes the property; the investor is not personally pursued for the difference. In my practice this has allowed investors to preserve non-real-estate assets and restructure their portfolios faster.

Example 2 (recourse): A homeowner defaults on a recourse mortgage. The lender forecloses, sells the house, and obtains a deficiency judgment for the remaining balance. The lender then pursues the homeowner’s wages and bank accounts to satisfy that judgment, creating long-term financial strain.

These examples show why loan type matters not just at origination, but many years into the loan’s life.

Who typically qualifies for which loan type?

  • Non-recourse loans: Lenders require stronger borrower equity, detailed financials, and often charge higher rates. They’re commonly offered to experienced investors, corporations, or to transactions with clear, valuable collateral. Borrowers with demonstrable expertise and substantial down payments have better prospects.
  • Recourse loans: More common for consumer credit, first-time homebuyer mortgages, and small-balance loans. Lenders rely on personal guarantees and wider recovery rights to reduce risk.

If you’re a business owner or real estate investor, you can sometimes negotiate non-recourse or carveouts (limited personal guarantees for specific liabilities). In my experience, negotiating carveouts—where guarantees are limited to fraud, environmental liabilities, or specific events—can be a practical middle ground.

Negotiation tips and lender considerations

  1. Read the loan documents carefully. “Recourse,” “non-recourse,” and “deficiency” are legal terms with precise meanings in the note and mortgage. Small clauses can materially change borrower risk.
  2. Ask about carveouts and guarantees. Many non-recourse loans still include narrow personal guarantees (e.g., for environmental damage, intentional misrepresentation, or lease guarantees). Know what you are signing.
  3. Compare cost vs. protection. Non-recourse financing may cost more upfront but reduce downside exposure—run the numbers on worst-case scenarios.
  4. Use counsel. I routinely advise clients to hire an attorney to review recourse provisions and advise on state-specific enforcement practices.

Common borrower mistakes

  • Assuming all mortgages are non-recourse. Consumer loans are frequently recourse; don’t assume personal assets are protected.
  • Ignoring carveouts. Borrowers think “non-recourse” means zero personal exposure—until a carveout clause is enforced.
  • Focusing only on rate. Lower interest on a recourse loan can be outweighed by the cost of personal risk.

Where to get help and additional reading

Internal resources on FinHelp:

(These internal links point to FinHelp.io resources to help you plan next steps.)

Bottom line

Non-recourse loans limit lender recovery to the collateral, while recourse loans allow lenders to pursue borrowers personally for deficiencies. The right choice depends on your risk tolerance, transaction type, and long-term plans. In many real estate and commercial deals, negotiating the scope of recourse—through non-recourse terms, carveouts, or partial guarantees—is as important as price.

Professional disclaimer: This article is educational and does not constitute individualized legal, tax, or financial advice. Consult a qualified attorney, tax advisor, or financial planner before making decisions that affect your liability or taxes.

Frequently asked questions

Q: Can a lender convert a non‑recourse loan into a recourse loan after origination?
A: Not typically without borrower agreement. The loan documents at origination dictate recourse rights; however, refinancing or restructuring can change terms.

Q: Will a non‑recourse foreclosure still harm my credit?
A: Yes. Foreclosure (recourse or non‑recourse) typically appears on your credit report for up to seven years and can significantly affect access to credit.

Q: Does a deficiency judgment always lead to wage garnishment?
A: Not always. The lender must first obtain a judgment in court and then use state enforcement mechanisms. Whether garnishment happens depends on state law and the borrower’s financial situation.

If you’d like a checklist to compare loan offers or a sample set of questions to ask lenders, our article on negotiating mortgage terms can help: https://finhelp.io/articles/negotiating-mortgage-terms