Private Money LendersRead time: 30 seconds
- Recourse means the lender can collect from you personally if the foreclosure sale does not cover the loan balance — they take the property, then pursue your other assets up to the deficiency amount.
- Non-recourse limits collection to the collateral — but only if you do not trigger one of the standard carveouts. Trigger one and the loan converts back to full-recourse.
- The eight standard carveouts (fraud, waste, unauthorized transfer, environmental, bankruptcy, failure to insure, misapplied rents, unpaid taxes) are nearly universal across lenders.
- Non-recourse costs more. Plan on 25–75 bps of rate plus 0.25–1.0 points compared to a recourse equivalent on the same property and term.
- It is a tax decision as much as a credit decision. Recourse loans can trigger ordinary-income forgiveness-of-debt on a deficiency; non-recourse is treated as a sale at the loan balance.
Two definitions, side by side
A recourse loan obligates the borrower personally — typically via a personal guarantee — to repay the debt. A non-recourse loan restricts the lender's collection rights to the collateral securing the loan. The borrower's personal assets are protected.
That much is universal. Everything that makes the choice consequential — pricing, structural eligibility, the carveouts, what triggers a conversion — lives in the contract language and the case law that interprets it.
Two facts most borrowers learn after closing rather than before:
- Most private-money and bank loans on investment property are recourse. Recourse is the default and the cheaper option. Non-recourse is opt-in and priced for the structural protection it provides.
- Most "non-recourse" loans are technically limited-recourse. They carve specific acts back to the borrower personally. The marketing copy says non-recourse; the loan documents say something more nuanced.
The honest framing: recourse is binary on a continuum. Full recourse on one end (your house, your car, your business), full non-recourse with zero carveouts on the other (extraordinarily rare), and most real loans somewhere in the middle.
How recourse actually plays out
When a recourse loan defaults, the lender moves through a sequence:
- Foreclosure on the secured property. Trustee sale or judicial foreclosure depending on state. The lender bids in at the auction or sells to a third party.
- Calculation of the deficiency. If the sale price is less than the unpaid balance plus fees, the difference is the deficiency.
- Deficiency judgment. The lender goes to court for a judgment against the borrower (or the guarantor, if the loan was made to an LLC with a personal guarantee).
- Collection against the borrower's other assets. Wage garnishment in most states, bank account levies, liens on other real property, and in extreme cases involuntary bankruptcy proceedings.
Some states are "one-action" states (California, Idaho, Nevada, Utah, Montana) where the lender must choose foreclosure or deficiency suit but cannot do both in sequence. Other states allow both. Some prohibit deficiency judgments on residential property entirely. A 2-unit investment in California may be deficiency-protected; the same building in Texas is not. Recourse is not just a contract term — it is a state-law overlay on top of the contract.
On a recourse loan, that $115,000 is what the lender can pursue against the borrower personally. On a true non-recourse loan with no triggered carveouts, the lender takes the $420,000 from the sale and writes off the rest. The recovery delta — $115,000 in this case — is the entire economic content of the structural difference.
The eight standard carveouts
Every non-recourse loan we see in the market reserves the right to convert to full recourse if the borrower commits any of a specific list of acts. The list is remarkably consistent across CMBS, agency multifamily (Fannie/Freddie), life-company loans, and private non-recourse lenders. The acts are called bad-boy carveouts or springing-recourse triggers. The eight that show up nearly everywhere:
- Fraud or intentional misrepresentation in the loan application or any required disclosure — overstating income, fabricated rent rolls, falsified appraisals.
- Physical waste of the property — gutting fixtures, stripping copper, removing HVAC equipment before foreclosure.
- Unauthorized transfer of the property or a change in control of the borrowing entity without lender consent (the "due-on-sale" clause given teeth).
- Environmental contamination — failure to clean up known contamination, or causing contamination on the property during the loan term.
- Voluntary bankruptcy filing by the borrower (some lenders also include collusive involuntary filings).
- Failure to maintain required insurance — letting the hazard policy lapse or canceling required flood coverage.
- Misappropriation of rents after default — collecting tenant rents and keeping them instead of applying them to debt service.
- Unpaid taxes or assessments that result in a lien senior to the lender's deed of trust.
Some carveouts trigger a full conversion — the entire loan balance becomes recourse. Others trigger loss recourse — only the amount of damage caused by the act is recourse. Read the carveout schedule carefully; "full springing recourse" on an unauthorized transfer is a much bigger personal exposure than "loss-only" recourse on the same trigger.
Two patterns we see borrowers underestimate:
- Insurance carveouts are tighter than expected. If a hurricane hits a property whose flood insurance lapsed two weeks earlier — even by accident — the lender may treat the loan as recourse for the uninsured portion of the loss.
- Unauthorized transfer can be triggered by adding a partner. Bringing in a 10% equity partner without lender approval can constitute a "change of control" if the operating agreement gives them voting or veto rights. Always run partnership changes by the lender first.
What non-recourse costs
Non-recourse is the more protective structure, so it commands a premium. The premium is not free, and on the wrong deal it is a meaningful drag on returns.
| Loan type | Typical rate premium | Typical points premium | Typical LTV cap |
|---|---|---|---|
| CMBS conduit | 25–50 bps over recourse equivalent | None (recourse not offered) | 65–75% |
| Agency multifamily | 50–75 bps over recourse | 0.25–0.75 points | 70–80% |
| Life-company perm | 50–100 bps over recourse | 0.5–1.0 points | 60–70% |
| Bank commercial RE | 50–125 bps over recourse | 0.25–0.5 points | 60–70% |
| Private non-recourse bridge | 100–200 bps over recourse | 0.5–1.5 points | 55–65% |
The premium widens at the riskier end of the spectrum and on shorter-duration money. A 30-year agency multifamily loan can offer non-recourse at a thin premium because the lender has the lowest-risk asset class in commercial real estate as collateral. A 12-month bridge loan on a value-add multifamily project sees the widest premium because the lender is taking real lease-up and execution risk and cannot fall back on the borrower's balance sheet.
Worked deficiency example
A common scenario where the recourse decision flips: a value-add multifamily acquisition that does not hit pro-forma rents on time. The borrower wants a 7-year fixed-rate bank loan; the bank offers two structures.
| Structure | Rate | Points | Personal guarantee |
|---|---|---|---|
| Option A — recourse | 6.85% | 0.75 | Yes, full |
| Option B — non-recourse with carveouts | 7.35% | 1.25 | Limited (carveouts only) |
Loan amount: $4.5M, 30-year amortization, 7-year term. The rate spread is 50 bps; the points spread is 0.5. Annual interest difference is roughly $22,500; one-time points difference is $22,500. Over the 7-year term, that is about $180,000 in extra carrying cost for the non-recourse structure.
Was it worth $180,000? Run the scenarios:
- Property hits pro-forma. The deal cash-flows, refinances, or sells at year 7. The borrower paid $180,000 for an option they did not need to exercise.
- Property underperforms by 15% on rents. Debt service is still covered, but cash-on-cash returns disappoint. No deficiency. The borrower still paid $180,000 for unused protection.
- Property underperforms by 35% on rents, eventually surrenders the property. Foreclosure sale yields $3.6M against a $4.4M unpaid balance plus $250K in costs. Deficiency: $1.05M. On Option A, the borrower owes that personally. On Option B, the lender takes the loss.
The non-recourse premium is insurance. The expected value depends on the probability of the third scenario. On well-located stabilized assets, that probability is in the low single digits and non-recourse is often a luxury. On value-add deals with execution risk, lease-up risk, or rate-cap exposure, the probability is higher and the math frequently flips to favor non-recourse.
Tax treatment of a deficiency
The tax consequences of a recourse vs non-recourse default are different enough that the choice can have a six-figure tax impact independent of the credit outcome.
Non-recourse foreclosure is treated by the IRS as a sale of the property at a price equal to the unpaid loan balance, regardless of the actual fair market value at foreclosure. There is no cancellation of indebtedness income. The borrower realizes a capital gain or loss based on basis vs the loan balance.
Recourse foreclosure splits the transaction into two pieces:
- A deemed sale at the fair market value at foreclosure, generating capital gain or loss.
- Cancellation-of-debt (COD) income equal to the deficiency that the lender writes off, taxed at ordinary-income rates.
On a property where the basis is much higher than the foreclosure value (a common pattern after years of depreciation), the recourse structure can produce a worse total tax outcome: a capital loss the borrower may not be able to fully use, plus ordinary-income COD that they certainly will. We have seen six-figure swings in the post-default tax bill based purely on whether the original loan was recourse or non-recourse.
Worth saying clearly: this is a tax-attorney question, not a lender question. The mechanics above are right but the application to a specific borrower depends on basis, prior depreciation, insolvency exclusions under §108, and primary-residence exclusions. Run any deficiency scenario past a qualified tax professional before signing.
When to pick which
Heuristics from underwriting deals in both structures:
- Recourse is the better default when: the asset is stabilized and well-located, the LTV is conservative (≤65%), the borrower has substantial liquid net worth and a long history of meeting debt obligations, and the rate/points premium for non-recourse is over 75 bps + 1 point.
- Non-recourse is worth the premium when: the asset has execution risk (value-add, lease-up, repositioning), the borrower's personal balance sheet is sensitive to a deficiency event, the loan is sized at 70%+ LTV, or the borrower has minor children or other risk-protection priorities that argue for shielding personal assets.
- The carveout schedule should be reviewed by a real estate attorney the borrower picks, not the lender's counsel. The schedule is where the actual personal exposure lives — and where the negotiation is genuinely worth the legal fees. Loss-recourse on carveouts is a meaningful improvement over full-springing-recourse and is worth asking for explicitly.
Recourse and non-recourse are not opposites. They are the start and end of a continuum, and every real loan lives somewhere in the middle. The question is not "which structure" but "which carveouts."PML Underwriting Team
Glossary
- Recourse loan
A loan where the lender can pursue the borrower's personal assets if foreclosure on the collateral does not satisfy the debt. The default structure for most commercial real estate loans under $5M.
- Non-recourse loan
A loan where the lender's collection rights are limited to the collateral, subject to a list of carveouts that can convert all or part of the loan back to recourse if triggered.
- Carveouts (bad-boy carveouts)
The specific acts — fraud, waste, unauthorized transfer, etc. — that convert a non-recourse loan to recourse. Always negotiate the carveout schedule before signing.
- Springing recourse
A clause that converts a non-recourse loan to full recourse upon a triggering event. The opposite of "loss-only" recourse, which limits the recourse to the actual loss caused by the act.
- Deficiency
The unpaid balance plus fees remaining after the foreclosure sale proceeds are applied. On a recourse loan, this is what the lender pursues personally.
- One-action state
A state where a lender must elect either foreclosure or a deficiency suit but cannot pursue both sequentially (California, Idaho, Nevada, Utah, Montana).
- Cancellation-of-debt (COD) income
Ordinary income equal to the amount of debt forgiven on a recourse loan deficiency. Reported on a 1099-C; subject to IRS §108 insolvency exclusions.
Frequently asked
Is hard money usually recourse or non-recourse?
Almost always recourse. The hard-money product class is short-duration, smaller-balance, and higher-rate; lenders price for the recourse structure rather than offering non-recourse alternatives. The exceptions are non-recourse private bridge programs in the larger-balance range ($5M+) that compete with bank execution.
Does PML offer non-recourse loans?
Our standard programs are recourse. Non-recourse is occasionally available on stabilized DSCR product for borrowers who require it and accept the rate and LTV trade-offs. Ask us in writing if non-recourse is structurally available for your specific deal — it depends on the asset, the LTV, and the borrower.
If my loan is in my LLC, am I personally protected?
Only if the lender did not require a personal guarantee. Most lenders require one — the LLC is the borrower on paper, you are the guarantor, and your personal assets are exposed up to the guarantee amount. Read your guarantee documents carefully; that is where the personal liability lives, not the loan documents themselves.
Can I negotiate the carveouts?
Yes, and you should. Loss-only carveouts (rather than full-springing) are commonly negotiable. Capping the carveout exposure at a percentage of the loan is sometimes available. Carving out specific environmental risks the borrower has already remediated is common. Bring an experienced real estate attorney to the carveout-schedule discussion.
What is a 'limited guarantee'?
A guarantee capped at a specific dollar amount or percentage of the loan, rather than the full unpaid balance. Common on agency multifamily and some bank loans. The cap can be a fixed dollar amount, a percentage of the loan, or a burn-down structure where the cap shrinks over the loan term as principal is paid down.
Can I switch my recourse loan to non-recourse mid-term?
Not on the same loan. A switch requires a refinance into a new non-recourse loan, which means new pricing, new closing costs, and a new underwriting. Some borrowers structure for this — start on a cheaper recourse bridge and refinance into non-recourse perm at stabilization.
If I default on a recourse loan, will the lender always pursue the deficiency?
Not always. Lenders evaluate the cost-benefit: legal fees, time to collect, and the borrower's actual collectible assets. If the borrower has minimal collectible assets, the lender may take the property and write off the deficiency rather than spend $50K on collection. That said, you should never count on this — the lender has the legal right to pursue and the deficiency can be sold to a collection agency that absolutely will.
Are there states where recourse loans on investment property are restricted?
California restricts deficiency judgments on purchase-money mortgages secured by 1-4 unit residential property (including investment property in some interpretations). Other states have anti-deficiency statutes that vary by property type and loan purpose. Always check state law before assuming a recourse loan is collectible against your other assets.
Want recourse priced against non-recourse on your deal?
Send us the property, the loan amount, and the term. We will quote both structures side-by-side so you can compare the actual premium for non-recourse on your specific transaction.