What is a non-resource loan? Who are the lenders? What does it take to qualify? These are just some of the questions we get asked. From your mortgage professionals, we’ll give you the run down of what you need to know about non-recourse loan financing.
The Basics About Non-Recourse Loan Financing
A non-recourse loan is a loan secure by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. In short, lenders can collect the collateral but may not go after the borrower’s other assets.
While potential borrowers may find it attractive to apply for a non-recourse loan, these types of loans often come with higher interest rates and are generally reserved for individuals and businesses with stellar credit histories.
Clearly, the majority of the risk and exposure with non-recourse loans rests with the lender. Therefore, a non-recourse loan may be more difficult to qualify for than a recourse loan. Commercial lenders will often only extend non-recourse loans to finance certain types of properties and only to worthy borrowers. Stable finances and an excellent credit score are two of the most important factors that a lender will look at. Generally, the loan requires the property to be a larger city, be in good condition, and have good historical financials, too.
Did you know that non-recourse loans benefit estate planning? Most commercial real estate borrowers do not think too much about what would happen to their loan if they pass away. Often, they assume that when their heirs inherit the property, they will inherit the loan as well. With a recourse loan, the heirs will have to qualify with similar qualifications as the original owner. If the heirs do not qualify, the loan can be called, leading to a stressful situation in the 11th hour.
With a non-recourse loan, the loan is made to a single asset entity like an LLC rather than an individual or individual. In most cases, the financial qualifications of the heirs are not questioned as long as the loan payments continue to be made on time.