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.

Feature	Recourse Loan	Non-Recourse Loan
Personal Liability	Yes — borrower personally liable for deficiency	No — lender can only seize the collateral
Lender Risk	Lower (can pursue borrower’s assets)	Higher (limited to property value)
Loan Terms	Typically more flexible	Stricter terms, lower LTVs
Common Use	Smaller or less institutional deals	Institutional, large-scale commercial real estate
Borrower Risk	Higher — personal assets at risk	Lower — liability limited to the asset

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)

Action	Consequence
Fraud or Misrepresentation	Borrower lied on loan documents or financials
Gross Negligence or Willful Misconduct	Actions like destroying the property, environmental damage
Voluntary Bankruptcy Filing	Borrower files for bankruptcy without lender approval
Unauthorized Transfers of Ownership or Title	Selling or transferring interest in the property without consent
Misuse of Insurance or Tax Escrow Funds	Not using insurance proceeds or tax payments as intended
Unpaid Taxes or Failure to Maintain Insurance	Letting required obligations lapse
Failure to Maintain the Property	Resulting in significant loss in collateral value

How a Non-Recourse Loan Can Become Recourse

A non-recourse loan does not mean zero personal risk. Here's how it flips:

Condition	Result
One of the carve-out clauses is triggered	Lender can sue for actual damages or entire loan balance
Fraud is discovered	The loan may become fully recourse
Property is intentionally harmed or devalued	Lender may collect beyond the property value

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.