Recourse Versus Non-Recourse Loans: A Guide For Buyers Of Apartment Buildings
Buying an apartment building is no minor endeavor. One of the most important aspects of the process is going to be securing financing for the purchase. This is a more complex and involved process than seeking a mortgage for a single-family home, since the amount you'll be borrowing is generally much greater. One of the important decisions you'll need to make at the forefront is whether to seek a recourse or a non-recourse loan. Here's a look at both options.
What's a recourse loan?
The difference between the two types of loans lies in what the lender is able to seize if you do not make your mortgage payments on the apartment building. With a recourse loan, the lender is able to seize your personal assets. They can come after your bank accounts, garnish your wages, and seize other valuable property you may own.
What's a non-recourse loan?
With a non-recourse loan, the lender is essentially out of luck if you stop paying on the mortgage. They can seize the apartment building, but if they are owned more than that, they cannot collect it from you. Your other assets and accounts are not touchable.
Which loan option is better?
At first glance, it seems like a no-recourse loan would always be the best option. After all, you won't want the lender to seize your other assets if you end up in financial trouble and are unable to pay on the loan. However, non-recourse loans are typically only offered to those who are buying properties worth several million. If you're buying a smaller, lower-cost apartment building, you will struggle to find a non-recourse loan—and probably won't find one at all.
Even if you are buying a very valuable property and can find lenders who are willing to offer you non-recourse loans, this is not always the best choice. Interest rates are typically much higher for non-recourse loans, so if you're fairly confident you're not at risk of falling behind on the mortgage, you can save yourself a lot of money by choosing a recourse loan. Then again, if you have a lot of expensive business ventures, choosing a non-recourse loan is a way to protect them should you run into trouble with one particular apartment building.
To learn more about these two types of loans and which is best for your situation, speak with a real estate agent or financial advisor in your area.