What are Non-Recourse Loans?

Non recourse loans are loans that are borrowed against the collateral or specific asset involved, such as a house. 

How Non Recourse Loans Work

Non recourse loans are based on the idea that collateral is enough to ensure that the borrower will make the payments to the best of their ability. In the event of the borrower defaulting, or not making payments toward the loan, the lender may take control of the collateral but nothing else belonging to the borrower. For example, if you default on your mortgage payments, the bank can seize your home, but they cannot attack or access your other assets.

High Risk of Lenders

Rules vary somewhat on a state-to-state basis, but in all states, non-recourse loans are relatively risky ones for lenders to undertake. Because the lender can only obtain the collateral if the loan goes sour, lenders may be hesitant to dole out non recourse loans.

The Loan to Value Ratio

In order for lenders to reduce their risk when it comes to non recourse loans, most prefer to provide loans with lower loan to value ratios. If you’re borrowing a mortgage worth 70% of the total value of your home and then default on the mortgage, the lender will need to sell the house for at least 70% of the total value that you paid for the home. With a lower loan to value ratio, the lender would own less of the house and be able to sell the house for less, if necessary, and still come out in a good position.