How Private Loans Differ From Bank Loans in Non-Recourse Lending

In non-recourse lending, banks and private lenders reach the same protection by different routes. A non-recourse loan limits the lender’s recovery to the collateral property, so the borrower’s other assets are generally safe. Banks grant that protection only on tightly underwritten deals, with rigid debt service coverage, conservative loan-to-value, and strong credit. Private lenders are faster and more flexible and will fund riskier or transitional deals, but they charge roughly 200 to 450 basis points more in interest to offset the risk. This guide breaks down how the two differ and where each one fits.

Key takeaways

• Non-recourse limits the lender’s recovery to the property. Both banks and private lenders offer it, on different terms.
• Banks are cash-flow lenders, bound to rigid DSCR, conservative LTV, and strong credit.
• Private lenders weigh the collateral and the project over formulaic credit, and fund deals a bank would decline.
• Private non-recourse loans cost roughly 200 to 450 basis points more than bank non-recourse loans.
• Both carry bad-boy carve-outs that can restore personal liability.
• Banks limit non-recourse to large or specialized deals. Private lenders serve small and mid-sized commercial borrowers.

What is non-recourse lending?

Non-recourse lending is lending where the lender’s recovery on default is limited to the collateral, usually the financed property. If the borrower defaults, the lender can take the property but cannot pursue the borrower’s other personal assets, absent a carve-out. For example, on a $2 million loan against an apartment building, if the borrower defaults, the lender takes the building and cannot reach the borrower’s other accounts or properties to cover any shortfall.

Because the lender carries more risk, non-recourse loans come with higher rates and stricter standards than recourse loans, whether they come from a bank or a private lender.

Recourse vs non-recourse loans

The difference between a recourse and a non-recourse loan is what the lender can pursue if the borrower defaults. A recourse loan includes a personal guarantee, so the lender can go after the borrower’s personal assets for any shortfall after selling the property. A non-recourse loan limits the lender to the property alone, absent a carve-out.

Most residential mortgages are recourse in much of the country, though some states limit lender recovery on a primary residence. In commercial real estate, non-recourse is common on larger, stabilized deals.

Private lenders and banks in non-recourse lending

Banks and private lenders serve different needs in non-recourse financing. A bank is the lower-cost route for a clean, stabilized deal when time is not tight. A private lender is the faster, more flexible route for a time-sensitive or complex deal, at a higher rate.

Risk tolerance and underwriting

Banks and institutional lenders fund conservative, low-debt asset types. Private lenders will fund riskier, complex, or transitional projects where a borrower’s personal balance sheet would otherwise be a hurdle. The private lender is betting on the collateral and the plan, not the borrower’s credit file.

Approval standards

Banks are cash-flow lenders, bound to specific metrics like DSCR and credit score. Private lenders prioritize the collateral’s value and the project’s viability over strict, formulaic requirements, which opens funding to borrowers a bank would turn away.

Borrowing costs

Bank interest rates and origination fees are lower, because banks fund from low-cost deposits and lend to lower-risk borrowers. Private non-recourse loans carry higher costs, roughly 200 to 450 basis points above a comparable bank loan, through higher rates or added points. That premium is the price of speed and flexibility.

Availability

Banks tend to limit non-recourse to large commercial properties or specialized vehicles. Private lenders fill the gap with accessible non-recourse options for small and mid-sized commercial borrowers, which is where a private lender is often the only practical route. 

What lenders offer non-recourse loans?

Non-recourse loans come mostly from institutional and specialty sources rather than everyday banks. Common non-recourse lenders include CMBS conduit lenders, Fannie Mae and Freddie Mac multifamily programs, HUD and FHA multifamily loans, life insurance companies, mezzanine lenders, REITs, and specialty finance companies. Most bank loans, mini-perm loans, and construction loans are recourse, and community banks and credit unions rarely offer true non-recourse structures. Private lenders sit in between: some offer non-recourse case by case, and many private loans are recourse or partial recourse.

Non-recourse loan requirements

Non-recourse lenders qualify the property first, because the property is their only recovery if the deal fails. Expect a higher bar than a recourse loan.

Property quality and DSCR

Lenders approve non-recourse loans for high-quality, income-producing assets, typically Class A or strong Class B property in solid markets. Most require a debt service coverage ratio of 1.25x or higher, so the property earns at least 25 percent more than its debt payments.

Conservative LTV and equity

Non-recourse lenders cap loan-to-value lower than recourse lenders to hold an equity cushion, commonly 65 to 75 percent, with a down payment of 25 to 35 percent.

Single-purpose entity

Non-recourse loans are frequently made to a single-purpose entity, an LLC formed solely to own the collateral property. Lenders often require the entity to be bankruptcy-remote, meaning its operating agreement limits it to owning that one property, which keeps the asset separate from the borrower’s other activities.

Partial recourse and burn-off structures

Not every non-recourse loan is fully non-recourse from day one. Lenders often use partial recourse through a limited payment guarantee, a completion guarantee, or a burn-off guarantee. With a burn-off, the loan starts as recourse and the personal guarantee falls away once the property hits a milestone, such as stabilized occupancy or a target DSCR. This is common on construction and value-add deals, where a lender is unwilling to go fully non-recourse before the property produces income. A frequent path is to close with a private lender on a transitional deal, then refinance into a fully non-recourse permanent loan once the property stabilizes.

Carve-outs and bad-boy guarantees

Carve-outs, also called bad-boy guarantees, are exceptions to the non-recourse protection that let the lender pursue the borrower personally when specific actions occur. Nearly every non-recourse loan includes them, from a bank or a private lender, and when triggered they can turn a non-recourse loan into full recourse.

Common carve-out triggers

• Fraud or misrepresentation in the loan application
• Misappropriating rents, insurance proceeds, or condemnation proceeds
• Voluntary bankruptcy or a collusive involuntary bankruptcy
• Failure to pay property taxes or maintain required insurance
• Unpermitted transfers of the property or a change in control
• Waste or physical damage to the collateral
• Environmental violations tied to the property

How bank and private carve-outs differ

Bank and institutional non-recourse loans, including CMBS and agency loans, use standardized, heavily drafted carve-out language a borrower has limited room to change. A private lender that offers non-recourse terms may negotiate the carve-outs deal by deal, which can mean narrower and better-defined triggers, or broader ones, depending on the lender. Read the carve-out clause closely either way, and have counsel review it, because the language is what decides where your protection actually ends.

Choosing between a private lender and a bank

The right choice depends on your risk profile, timeline, property, and cost tolerance. A bank fits a stabilized, conventional property with a strong borrower profile and time to close, when the lowest rate is the priority. A private lender fits a time-sensitive or complex deal, a property a bank has declined, or a small-to-mid-sized borrower who wants speed and flexible structure. Many investors close with a private lender to move fast, then refinance into bank or agency non-recourse debt once the property stabilizes.

Non-recourse lending at Fidelity

Fidelity Mortgage Lenders arranges business-purpose loans secured by commercial and investment real estate, and works with small and mid-sized commercial borrowers who need speed and flexibility a bank cannot match. Loan structure, including whether a loan is recourse or non-recourse and how any carve-outs are written, is set per transaction based on the property, the borrower, and the deal.

To discuss a specific deal, contact a Fidelity representative at (800) 752-9533 or info@fidelitylenders.com.

Frequently asked questions

Is it better to get a loan from a bank or a private lender?

It depends on the deal. A bank is usually better for a stabilized, conventional property when you have time and want the lowest rate. A private lender is better for a time-sensitive or complex deal, a property a bank declined, or a borrower who values speed and flexibility over cost.

What are the different types of non-recourse loans?

Common non-recourse loans include CMBS conduit loans, Fannie Mae and Freddie Mac multifamily loans, HUD and FHA multifamily loans, life-company loans, and some mezzanine and specialty loans. Many are used for stabilized commercial and multifamily property.

How is private credit different from bank lending?

Private credit is non-bank lending funded by private capital, such as debt funds and specialty lenders, rather than by customer deposits. It is less regulated, faster, and more flexible than bank lending, and it prices in more risk. Bank lending is deposit-funded, heavily regulated, and lower cost, with stricter qualification.

What are the cons of a private loan?

Private loans cost more than bank loans, often carry shorter terms, and usually require a clear exit plan such as a sale or refinance. The tradeoffs buy speed, flexible structure, and access when a bank will not lend.

How much more do private non-recourse loans cost?

Private non-recourse loans generally cost roughly 200 to 450 basis points more in interest than a comparable bank non-recourse loan, plus potentially higher points, to offset the added risk the private lender takes.

What triggers a bad-boy carve-out?

Common triggers include fraud, misappropriating rents or insurance proceeds, voluntary bankruptcy, failing to pay taxes or insurance, unpermitted transfers, waste, and environmental violations. Some lenders also include lesser acts, such as late financial reporting or refusing an inspection.

Disclaimer: This article is provided for general educational purposes only and is current as of the date shown above. It is not legal, tax, financial, or investment advice, and it does not create a professional relationship. Recourse and non-recourse terms, carve-out provisions, rates, and eligibility vary by lender, loan program, property, and individual circumstances, and carve-out language is a matter of contract that can create significant personal liability. Any figures cited are drawn from published industry data and are illustrative, not quotes or guarantees. Consult a licensed attorney and a qualified financial advisor before agreeing to any loan or guarantee.

Disclosure: Fidelity Mortgage Lenders is a licensed real estate broker that arranges private money loans secured by commercial or residential real estate for business purposes in California, Colorado, Idaho, Montana, Oregon, Texas, Utah, and Washington. Ask us about loans in Nevada. Fidelity makes non-consumer, business-purpose loans only; these loans are not for personal, family, or household use. California Department of Real Estate, Real Estate Broker No. 00388229. Corporate NMLS ID No. 1726526. Readers should evaluate their own circumstances and obtain a customized quote before borrowing.