Keith Britto | Wealth Management

Recourse vs. Non-Recourse Lending

A recourse loan is one where the lender can come after you for any excess amount of money you owe. Whether a loan is recourse or non-recourse varies with the state you are in, whether it was a purchase money loan or a refinance, and always, what it says in the Note.

For a non-recourse loan, all there is if the property goes into default and the property does not fetch enough money at sale to pay the lender off, that lender is out of luck whether they want to be or not. Due to the fact that the lender cannot come after the borrower for the difference, these are riskier loans and therefore carry a higher rate-cost trade-off than recourse loans.

The law is different in every state, in almost all cash out refinance loans these are almost always a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of ways to get that money back.

Now just because a loan is non-recourse does not mean that the lender will necessarily approve a short payoff. In fact, it is usually harder to get those approved because the lender knows that this is the only chance they have to get their money, whereas with a recourse loan they can attach other assets to pay for their loan.

Finally, it is to be noted that just because a lender does have recourse and can attach other assets does not mean that they will. If you're down to a few dollars to your name, they'd have to be pretty silly to waste a lawyer's time doing so. However, just because you don't have it now doesn't mean that you will never have it. Statute of limitations also varies, but if you receive a financial windfall within the first few years, don't be surprised if the lender who you thought forgave the difference is standing right there, demanding their "pound of flesh".

Please Define Full, Limited and Non-Recourse Lending?

Recourse Lending, refers to the right, in an agreement, to demand payment from the person who is taking on an obligation. A full recourse loan refers to the right of the lender to take any assets of the borrower if repayment is not made. A limited recourse loan only allows the lender to take assets named in the loan agreement. A non-recourse loan limits the lender's rights to the particular asset being financed -- an approach that is common on home mortgages and other real estate loans.