What Is Full-Recourse Debt?
Full-recourse debt is a type of secured debt that gives the lender rights to assets—beyond just the secured collateral specified in the loan contract—to cover the full repayment of the borrower’s loan obligations if they default on the loan.
In other words, loans with full-recourse provisions offer lenders additional remedies to pursue 100% of the outstanding loan amount, including legal action.
Key Takeaways
- Full- and non-recourse debt are examples of secured loans.
- Full-recourse debt is common in the mortgage loan sector.
- Full-recourse debt gives the lender the right to seize assets beyond the specified collateral in case the borrower defaults on the loan.
Understanding Full-Recourse Debt
When a borrower enters into a secured loan contract, the terms of the contract may be either full- or non-recourse. The provisions of a full-recourse loan give the lender rights to more assets than just the secured collateral specified in the contract.
Full-recourse debt mitigates risk for the lender. A lender may choose to integrate a full-recourse clause into the loan agreement if they believe that a secured asset likely will decrease.
Full-Recourse Loans and Mortgages
Full-recourse loan provisions are common in loan agreements that use a real estate property (i.e., mortgages) as collateral. For example, if a borrower were to default on their mortgage loan, then that lender would want to seize the property and foreclose.
However, if the property's resale value does not cover the entire amount due to the lender, then—provided the loan contract had a full-recourse provision—full-recourse rights would kick in. So mortgage bankers generally add full-recourse clauses to their loan agreements to protect themselves from the risk of a drop in collateral value.
Full-Recourse Lender Rights
A full-recourse provision grants the lender the right to seize any additional assets that the borrower may own and use them to recoup the remaining amount due to them. Depending on the terms of the full-recourse loan, lenders could gain the authority to tap a borrower’s bank accounts, investment accounts, and wages.
For the lender, full-recourse debt is practically risk-free.
Full-Recourse vs. Non-Recourse Debt
Full-recourse and non-recourse debt are associated with secured loans. The essential difference between a full-recourse and non-recourse loan has to do with the types of assets a lender can claim if a borrower fails to repay a loan.
Non-Recourse Debt
In contrast to full-recourse debt, non-recourse debt does not give a lender any rights to additional assets if a borrower defaults on a secured loan. In a non-recourse mortgage loan, the lender would not have rights to any assets beyond the real estate collateral.
Thus, non-recourse debt presents some collateral risk for the lender, as there is a chance that the collateral value could fall below a borrower’s repayment value. However, as a mortgage loan progresses, the collateral risk will decrease for the lender because greater portions of the loan will be paid off.
That the collateral value may decrease is usually an important risk consideration in the underwriting process. This risk is one reason that lenders typically have a loan-to-value ratio threshold for the amount of principal that they will issue to a secured borrower. Most lenders usually require a loan-to-value ratio of no more than 80%. Higher ratios can be approved but will typically require primary mortgage insurance (PMI).
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What Other Types of Assets Are at Risk in a Full-Recourse Loan?
Every loan agreement is different, and the types of assets that may be vulnerable should be outlined in the agreement. Typically, the lender could tap into personal bank accounts, investment accounts, or real estate to recover their investment.
What Types of Loans Are Most Often Full-Recourse loans?
Most full-recourse loans are secured by real estate. Mortgages are the most common type of full-recourse loan.
Are Non-Recourse Loans Unsecured?
Both full and non-recourse loans are secured by collateral. However, if the value of the property has decreased, a full-recourse loan will require the borrower to pay back the full amount borrowed, including unpaid interest and fees, even if the property is no longer worth the original amount.
The Bottom Line
Full-recourse loans are a big win for lenders but can be very risky for borrowers. If you purchase a property in a volatile market, you may have to dip into your personal accounts to cover the cost of the property when the market value drops. Read any full-recourse loan agreements very carefully to find out what assets are fair game in the event of a devaluation.
FAQs
A full-recourse provision grants the lender the right to seize any additional assets that the borrower may own and use them to recoup the remaining amount due to them. Depending on the terms of the full-recourse loan, lenders could gain the authority to tap a borrower's bank accounts, investment accounts, and wages.
How does recourse debt work? ›
There are two types of debts: recourse and nonrecourse. A recourse debt holds the borrower personally liable. All other debt is considered nonrecourse. In general, recourse debt (loans) allows lenders to collect what is owed for the debt even after they've taken collateral (home, credit cards).
What does complete recourse mean? ›
Recourse is the lender's legal right to collect the borrower's pledged collateral if the borrower does not pay their debt obligation. Full recourse means that in addition to the collateral the lender can also seize other assets from the borrower to repay the debt.
When a loan is taken with recourse it means that? ›
A recourse loan is a form of secured financing. It lets the lender go after the debtor's other assets that were not used as loan collateral or take legal action in case of default to pay off the full debt.
What is 100% recourse? ›
Recourse loans make the borrower 100% liable for the loan amount; if the borrower defaults, the lender can pursue other means to recover the money.
What is the meaning of full-recourse? ›
A full-recourse provision grants the lender the right to seize any additional assets that the borrower may own and use them to recoup the remaining amount due to them. Depending on the terms of the full-recourse loan, lenders could gain the authority to tap a borrower's bank accounts, investment accounts, and wages.
What are the risks of recourse debt? ›
Recourse loans heighten the risk for borrowers as lenders reserve the right to pursue the borrower's personal assets beyond the collateral in the event of default. For instance, imagine a scenario where an individual takes out a recourse stock loan and encounters financial difficulties, leading to a default.
What is the full meaning of recourse? ›
: a turning to someone or something for help or protection. settled the matter without recourse to law. b. : a source of help or strength : resort.
What is full rights of recourse? ›
Rights of Recourse means any right, action or claim the Pledgor may have (whether by way of subrogation, indemnification or otherwise) against any other Obligor which has granted security or guarantee, or is liable, for all or part of the Secured Obligations, including the Pledgor's right of recourse against any such ...
What does recourse mean in finance? ›
A recourse loan allows a lender to pursue additional assets when a borrower defaults on a loan if the debt's balance surpasses the collateral's value. A non-recourse loan permits the lender to seize only the collateral specified in the loan agreement, even if its value does not cover the entire debt.
The portion for which one or more partners bear an economic risk of loss is treated as a recourse liability for basis purposes and allocated exclusively to the partner or partners who bear that risk of loss. The remainder is treated as a nonrecourse liability.
Are recourse loans bad? ›
A recourse loan is a good choice if you want to find a competitive low interest rate. They almost always come with more favorable interest rates than non-recourse loans because there is less risk for lenders if you are unable to repay your debt. A non-recourse loan is best if you have an excellent credit score.
What does 50% recourse mean? ›
Related Definitions
50%, Recourse Loans means, collectively, all of the Participated Loans that are placed in the 50% Recourse Pool and are subject to CHS' guarantee pursuant to Article V hereof, subject to the limitations described in Section 5.01(b).
What is an example of a recourse debt? ›
Recourse Loan:
In other words, if the borrower fails to repay the loan and the collateral's value isn't enough to cover the debt, the lender can go after the borrower's personal assets to satisfy the remaining balance. Common examples: Bank loans and credit union loans are typically recourse debt options.
What does recourse mean in law? ›
A legal recourse is an action that can be taken by an individual or a corporation to attempt to remedy a legal difficulty. A lawsuit if the issue is a matter of civil law. Contracts that require mediation or arbitration before a dispute can go to court.
What is recourse on bad debts? ›
Recourse debt gives the creditor full autonomy to pursue the borrower for the total debt owed in the event of default. Both unsecured and secured personal loans can be recourse debts where the borrower assumes all risk and is personally liable.
Can you take losses against recourse debt? ›
A helpful concept for establishing tax basis is debt recourse. Partners within a partnership are liable for debt incurred by the business, which means they are also entitled to deduct losses. The IRS allows partners to increase their basis by the amount of debt where there is recourse.
Are limited partners liable for recourse debt? ›
Limited partners are not personally liable for any unpaid debts of the partnership, except to the extent they have a deficit restoration obligation. Members of a limited liability company (LLC) taxed as a partnership are generally treated under state law as limited partners in a limited partnership.
