Be sure to Subscribe to The Loan Lounge on either YouTube or Apple Podcasts
If you’ve never heard of a non-recourse loan, you’re not alone. For most real estate investors-especially beginners-recourse loans are the norm. But in this blog post, we’ll break down what a non-recourse loan is, when it makes sense to use one, and why it’s not always the go-to strategy for every investor.
What Is a Non-Recourse Loan?
A non-recourse loan is a type of financing where the borrower is not personally liable for the debt. That means if things go south and the property can’t be sold to cover the loan balance, the lender cannot go after your personal assets. The property itself is the only collateral.
In contrast, most loans in the real estate investment world are recourse loans. With a recourse loan, you personally guarantee the loan. If you default, the lender can pursue your personal finances to recover losses.
When Do Non-Recourse Loans Make Sense?
The most common (and really, only common) scenario where a non-recourse loan makes sense is when purchasing a property through a self-directed IRA. Since an IRA is not a person and cannot legally provide a personal guarantee, only non-recourse loans can be used for those transactions.
Outside of that? It’s rare—and usually not worth it.
The Drawbacks of Non-Recourse Loans
While the concept of “no personal liability” sounds appealing, non-recourse loans come with significant trade-offs:
- Higher Interest Rates: Lenders charge more to offset their increased risk.
- Lower Loan-to-Value (LTV) Ratios: You’ll need to bring more cash to the table.
- Shorter Terms: Many non-recourse loans have shorter amortization periods.
- Adjustable Rates (ARMs): Fixed-rate options are less common.
- Stricter Property Performance Requirements: Lenders may require higher DSCR (Debt Service Coverage Ratio) minimums.
All these factors can make the deal harder to pencil out-especially for first-time investors.
Do Non-Recourse Loans Exist in the Fix & Flip World?
Surprisingly, yes. Some fix-and-flip lenders offer non-recourse loan options, but they’re not standard. They typically aren’t promoted heavily and usually only make sense if there’s a specific legal structure-like an IRA or certain types of partnerships-where a personal guarantee isn’t possible.
This is where working with a broker like LFG Lending can help. We understand which lenders offer non-recourse options and can walk you through the pros and cons.
Does Non-Recourse Mean It Won’t Affect My Credit?
Even if a loan doesn’t report to your personal credit, that doesn’t mean it won’t impact your ability to qualify for other loans-especially if you’re using your tax returns to apply for a primary residence. However, if your business has paid the loan consistently for 12 months, that debt can often be excluded from your DTI (Debt-to-Income) ratio.
Should You Use a Non-Recourse Loan?
The bottom line? Unless you’re purchasing property through a self-directed IRA or part of a complex investment entity (like a syndication), non-recourse loans probably aren’t necessary. You’ll pay more and get stricter terms for protection you might not actually need.
But if your situation calls for one-we can help. At LFG Lending, we’re constantly expanding our lender network and can connect you with the right solution based on your goals and structure.
Are you looking for a more flexible loan option?
Our team can give you the most options, give them a call today!