A non-recourse loan gives the lender the right to repossess the property but not to seize the borrower’s personal assets.
This type of loan is sometimes offered in commercial multifamily lending and is attractive to many investors for obvious reasons.
Say you purchase an apartment building. But then a major employer moves out of town, leaving you with low occupancy. You suddenly can’t pay the debt service (mortgage payments).
With a non-recourse loan, the lender can only take the property. It can’t seize your personal retirement funds, bank accounts or your primary residence upon default.
That’s not the case with a recourse loan. The lender may have rights to go after your personal assets if seizing and selling the property was not enough to pay off the underlying loan.
Most traditional residential home mortgages are non-recourse. But in the commercial world, recourse loans are very common. When a lender gives you that much money, it wants to be sure it will get most or all of it back, even if it means leaving you with few or no assets when it’s all said and done.
But keep in mind that you’re not fully protected even with a non-recourse loan. Lenders impose “bad boy carve-outs” which turn a non-recourse loan into a recourse loan for bad actors. Say you turn in fraudulent application documents or terribly mismanage the property so that renters move out and the building falls into disrepair. Don’t expect much protection from the non-recourse loan in that case.
So where do you find a non-recourse loan for multifamily properties? Fannie Mae and Freddie Mac are two government agencies that offer non-recourse loan options. Their small balance programs are quite popular because of this feature.
For new multifamily buyers, you may have no choice but to select a recourse loan. That’s because aggressive lenders are okay with lending to first-timers, but require greater assurances of getting their money back.
The bottom line: Get a non-recourse loan if you can find one. But if not, it could be worth moving forward with your real estate goals even with a recourse loan.