What's the Difference Between a Recourse and Non-Recourse Loan in Real Estate?
A recourse loan allows the lender to pursue the borrower’s personal assets if the property securing the loan doesn’t fully cover the outstanding debt after foreclosure. In contrast, a non-recourse loan limits the lender’s recovery to the value of the collateral property only, offering greater personal liability protection to the borrower. Because of this, non-recourse loans are typically harder to qualify for and come with stricter terms or lower loan-to-value (LTV) ratios.
What Are Carve-Outs ("Bad Boy Guarantees")?
Carve-outs are exceptions written into a non-recourse loan that trigger personal liability if the borrower engages in certain prohibited or unethical behaviors.
They "carve out" specific conditions where the loan becomes partially or fully recourse — meaning the borrower or guarantor can be held personally liable even if the loan is technically non-recourse.
Common Carve-Out Triggers (Bad Boy Acts)
How a Non-Recourse Loan Can Become Recourse
A non-recourse loan does not mean zero personal risk. Here's how it flips:
Example: If a borrower pockets the insurance proceeds after a fire and doesn’t use them to repair the building, the lender can pierce the non-recourse protection and sue the borrower personally.
Summary
Even with non-recourse loans, bad behavior nullifies the protection. Lenders use carve-outs to discourage risky or dishonest actions and ensure borrowers uphold key responsibilities.
Let me know if you’d like a full sample carve-out clause, or a borrower’s checklist to avoid triggering recourse.