Question about nonrecourse states & DSCR loans

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Question about nonrecourse states & DSCR loans

Sean Bramble
Investor · United States · Member since 2020 · 202 posts · 284 votes

I'm new to RE and just learned about the 12 nonrecourse states. Couple of questions:

- if a borrower defaults in a nonrecourse state, will an LLC protect them from a big hit to their personal credit?

- are DSCR loans in these states also by definition "nonrecourse"?

- can loans in these states "become" recourse loans if the lender simply asks the borrower to also sign a personal guarantee?

Thanks everyone!

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Matthew CrivelliBusiness Member
Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
3y

@Sean Bramble

Very few DSCR loans are non recourse. The only non recourse DSCR loans I've ever been able to close is when the borrower is using a self directed IRA to complete the purchase / refi. Typically the borrower is taking a major LTV hit when using a SDIRA. (I closed a SDIRA refi in TX recently at 60% LTV, that was max leverage) If you give a personal guarantee on a loan and you fold, your credit will be cooked and the home will be foreclosed on no matter the state. The LLC will not offer protection in this case.

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  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    3y

    @Sean Bramble

    Very few DSCR loans are non recourse. The only non recourse DSCR loans I've ever been able to close is when the borrower is using a self directed IRA to complete the purchase / refi. Typically the borrower is taking a major LTV hit when using a SDIRA. (I closed a SDIRA refi in TX recently at 60% LTV, that was max leverage) If you give a personal guarantee on a loan and you fold, your credit will be cooked and the home will be foreclosed on no matter the state. The LLC will not offer protection in this case.

    [email protected]413-348-8346
    Freedom Capital Funding, LLC523 Reviews
    WebsiteView Page
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  • Riaz Gillani
    Lender · Member since 2021 · 100 posts · 164 votes
    3y

    In the private lending (DSCR) space, levels of recourse are dependent on the lender, not the state. So it's more important that you ask your lender if their loans are recourse / require a PG.

    It's also worth noting that your personal credit may still take a hit if you default on a non-recourse loan. Especially if that loan reports to credit bureaus. The lender just has no legal course to pursue your personal assets in order to ensure full repayment. 

    Re: question #3, mortgages typically cannot become recourse after being recorded. An exception is partial recourse loans where the loan becomes recourse if one of the listed events happens to have transpired (bad boy carve-outs). And again the level of recourse is based on the lender (see above). So yes, loans in the states you're thinking of can be recourse if there is a PG. 

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  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    3y
    Quote from @Sean Bramble:

    I'm new to RE and just learned about the 12 nonrecourse states. Couple of questions:

    - if a borrower defaults in a nonrecourse state, will an LLC protect them from a big hit to their personal credit?

    - are DSCR loans in these states also by definition "nonrecourse"?

    - can loans in these states "become" recourse loans if the lender simply asks the borrower to also sign a personal guarantee?

    Thanks everyone!


    Can you elaborate here? The loan product known as "DSCR" (i.e. the non-QM securitizable market) is pretty much uniformly recourse loans. Are you referring to states in which the borrower must be an entity (LLC) rather than an individual?

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    3y
    Quote from @Sean Bramble:

    I'm new to RE and just learned about the 12 nonrecourse states. Couple of questions:

    - if a borrower defaults in a nonrecourse state, will an LLC protect them from a big hit to their personal credit?

    - are DSCR loans in these states also by definition "nonrecourse"?

    - can loans in these states "become" recourse loans if the lender simply asks the borrower to also sign a personal guarantee?

    Thanks everyone!


     Hey Sean, 

    Most DSCR Loans are recourse loans. There are a few that do offer a non-recourse in a bridge loan option (max term 24 months). You would need an exit strategy.

    [email protected]818-269-7983
    LuxePrivate Investments LLC 572 Reviews
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