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What Are Recouse Versus Non-recourse Loans on Commercial loans
Can someone please explain the difference between recourse and non-recourse loans on commercial loans?
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1 Reply
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Recourse and non-recourse mortgage loans are two different types of mortgage loans that determine the lender’s ability to seek repayment beyond the collateral (typically the property) in case the borrower defaults on the loan. The main difference between them lies in how the lender can recover their losses in the event of a default:
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Recourse Mortgage Loan:
- In a recourse mortgage loan, the lender has the legal right to go after the borrower’s personal assets and income beyond the collateral (the property) if the borrower defaults on the loan and the sale of the property does not cover the outstanding debt.
- This means that if the property’s value decreases significantly, and it is not sufficient to cover the loan balance, the lender can pursue the borrower’s other assets or income sources to make up the difference.
- Recourse loans provide more protection for lenders and can be riskier for borrowers because they are personally liable for any shortfall in the event of foreclosure or default.
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Non-Recourse Mortgage Loan:
- In a non-recourse mortgage loan, the lender’s sole recourse in the event of a default is the collateral itself, which is typically the property being financed. The lender cannot pursue the borrower’s personal assets or income beyond the value of the property.
- If the property’s value is insufficient to cover the outstanding loan balance in a foreclosure sale, the lender must absorb the loss, and the borrower is not personally responsible for the shortfall.
- Non-recourse loans are generally considered less risky for borrowers, as they provide protection against personal liability in case of a default.
It’s important to note that the classification of a mortgage loan as recourse or non-recourse can vary by jurisdiction and may also depend on the specific terms of the loan agreement. Additionally, the availability of non-recourse loans may be more common in certain types of mortgages, such as residential mortgages, as opposed to commercial real estate loans.
Before entering into any mortgage agreement, borrowers should carefully review the terms and seek legal and financial advice to fully understand their rights and obligations in the event of a default.
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