Quick answer

Non-recourse loans limit a lender’s recovery to the property that secures the loan. Recourse loans let the lender seek any remaining unpaid balance from the borrower after foreclosure, subject to state law and contract terms (for example, personal guarantees or carve-outs). See guidance from the Consumer Financial Protection Bureau and state courts for how deficiency judgments are handled in practice (Consumer Financial Protection Bureau, CFPB; Internal Revenue Service, IRS).

How each loan works (simple examples)

  • Recourse: You borrow $500,000 secured by a property. After default, sale of the property raises $400,000. The lender can seek the $100,000 shortfall from you (deficiency judgment) or call a personal guarantee.
  • Non-recourse: Same numbers, but after foreclosure the lender’s recovery stops at the property. The lender cannot pursue your other assets for the $100,000 balance, except in limited carve-out situations spelled out in the loan documents.

Important exceptions and lender protections

  • Carve-outs (a.k.a. borrower carve-outs or bad-boy guarantees) convert an otherwise non-recourse loan into one with recourse for certain actions—fraud, intentional misrepresentation, waste, or failure to maintain insurance. Negotiating these is critical; see Negotiating Limited-Recourse Carve-Outs in Commercial Loan Documents for negotiation tips.
  • Personal guarantees: Many loans marketed as “non-recourse” may still require a personal or affiliate guaranty for specific obligations.
  • Springing recourse: Some agreements impose recourse if specific triggers occur (e.g., bankruptcy fraud or transfer of the property).

Internal resources: see our guide on Protecting Personal Assets: When to Ask for Non-Recourse Loan Terms and the article on Negotiating Limited-Recourse Carve-Outs in Commercial Loan Documents for sample clauses and negotiation strategies.

Who typically gets which loan?

  • Non-recourse: More common in commercial real estate and offered to experienced investors or entities with strong equity positions. Lenders price risk into the loan—expect stricter underwriting and higher rates or equity requirements.
  • Recourse: More common for consumer mortgages, smaller commercial loans, and borrowers with weaker collateral or higher perceived risk.

Pros and cons (at-a-glance)

  • Recourse loans
  • Pros: Usually lower rates and easier access to credit.
  • Cons: Personal assets may be at risk after default; deficiency judgments depend on state law.
  • Non-recourse loans
  • Pros: Limits borrower’s personal exposure; useful for risk management.
  • Cons: Higher borrower requirements, stricter loan covenants, and possibly higher costs.

Tax and credit considerations

A lender’s cancellation of debt or a deficiency judgment can have tax consequences. Canceled debt may generate taxable income and sometimes triggers reporting on Form 1099‑C—consult IRS guidance and a tax advisor for specific cases (IRS: cancellation of debt guidance).

Professional tips

  • Read the loan documents line-by-line for carve-outs, guaranty language, and springing recourse clauses; what’s called “non-recourse” on a term sheet may not be fully non-recourse in the contract.
  • Negotiate carve-out language to narrow exceptions and limit personal guarantees. Use the limited-recourse negotiation checklist in our Negotiating Limited-Recourse Carve-Outs in Commercial Loan Documents article.
  • Consider your exit plan: if a loan is likely to require future refinancing, discuss refinance terms and whether the non-recourse protections survive.

Common mistakes borrowers make

  • Assuming “non-recourse” means zero personal risk—many loans include limited recourse triggers.
  • Ignoring state-specific deficiency rules; some states limit or bar deficiency judgments for residential loans.
  • Overlooking tax effects of forgiven debt.

Short FAQs

  • Can I refinance a non-recourse loan? Yes, but lender requirements and pricing vary.
  • Will a non-recourse loan protect my personal credit? Foreclosure still affects credit; non-recourse limits collection of other assets but not reporting of default.
  • Are non-recourse loans cheaper? Not usually—lenders charge more or demand greater equity to offset risk.

Bottom line

Non-recourse and recourse loan choices shape your personal and business risk in real estate deals. Read loan agreements carefully, negotiate carve-outs and guarantees, and consult a lender attorney and tax advisor before signing.

Disclaimer: This content is educational and does not replace personalized legal, tax, or financial advice. For specific guidance, consult qualified professionals.

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