Mortgages & Home Loans

What Is a Non-Recourse Loan?

Updated on October 19, 2022

A person writes on a sheet of paper in a kitchen. — Photo:
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Definition

A non-recourse loan is a type of debt that relies on collateral for security and for which the borrower is not personally liable. A lender can’t pursue additional compensation for a non-recourse loan if the borrower defaults on the loan and the collateral does not cover the full value of the debt.

Key Takeaways

Non-recourse loans protect borrowers in the event that they default on their debt.
Non-recourse loans prohibit a lender from pursuing you for additional debt, even when your collateral isn’t enough to cover what you owe.
Some states mandate that mortgages are non-recourse loans.

How Non-Recourse Loans Work

There are two main types of debt you’ll receive from a lender: recourse and non-recourse. With a recourse loan, you are personally liable for your debt, which means the lender can pursue repayment from you. With a non-recourse loan, you are not personally liable for the debt, and the borrower may only pursue any collateral you have pledged against the loan. The type of loan you’ll receive can depend on a variety of factors, including the loan you’re seeking and your geographic location.

If you had a recourse loan and defaulted on your debt, the lender can pursue the full value of the debt, even if they’ve already collected any collateral you’ve had on the loan. This can include garnishing your wages or pursuing other avenues in order to collect the debt.

A non-recourse loan prohibits this practice. With a non-recourse loan, the lender can only take back the collateral used to secure the loan. This is true even if the value of the collateral doesn’t satisfy the full value of the debt.

Note

Another type of loan—limited recourse—allows lenders to pursue any collateral named in the loan documents.

Examples of Non-Recourse Loans

A common type of non-recourse loan is found in several U.S. states: the residential mortgage.

In California, for example, the anti-deficiency statute forbids a creditor from collecting a deficiency judgment on mortgages. This makes all California mortgages non-recourse loans.

Now, let’s say you purchased a house in California in 2020. At the time, the property was valued at $530,000, and your mortgage totaled $500,000. However, since then, a roof leak has caused some serious damage on the property, significantly lowering its value.

Adding to your woes, let's say you've also lost your job, which means you’re unable to afford either the repairs to the home or the mortgage payments. The bank has opted to foreclose on the property, although the damage that has occurred means it’s only worth $450,000.

Note

Not all states have non-recourse loan options. Research the law in your state to see if there's an anti-deficiency law in place where you live.

Although the lender has opted to collect your collateral (the home), due to California’s anti-deficiency statute, you aren’t personally liable for the difference between the value of the property and the entire amount of the debt you owe. This means the bank will need to absorb the $50,000 loss rather than pursue you for the remaining amount of funds you owe.

Non-Recourse Loans vs. Recourse Loans

Non-Recourse Loans	Recourse Loans
Generally secured by collateral	Not necessarily secured by collateral
Lender can’t pursue you for outstanding debt	Lender can pursue you for outstanding debt
Dependent on the loan type and state you’re in	Dependent on the loan type and state you’re in

Frequently Asked Questions (FAQs)

What is a non-recourse loan in real estate?

In certain states, mortgages are considered non-recourse loans. This means your lender can’t come after you for any outstanding debt on a foreclosed home. This is true even when the value of the property does not equal the total debt you owe. The lender instead must absorb the difference between the value of the collateral (the home) and the debt as a loss.

What is the difference between recourse and non-recourse loans?

There are two basic types of debt you can acquire from a lender. A recourse loan allows a lender to enact action to force you to repay your debt if you end up in default. This can include a levy on your bank account or a garnishment of your wages.

A non-recourse loan is the opposite: The lender cannot hold you personally liable for the debt you’ve accrued. A non-recourse loan is generally secured by collateral. However, in the event that the value of the collateral is not enough to clear your debt, the lender is still unable to seek additional compensation for the residual balance of the loan.

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Sources

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