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What is a Nonrecourse Loan? A Comprehensive Legal Overview
Definition & meaning
A nonrecourse loan is a type of secured loan where the borrower is not personally liable for repayment. Instead, the loan is backed by collateral, typically real estate. If the borrower defaults, the lender can only recover the collateral and cannot pursue the borrower for any remaining debt. This means that if the collateral's value is less than the loan amount, the lender absorbs the loss. Nonrecourse loans often require the loan amount to be a percentage of the collateral's value, usually between 50 to 60 percent, to ensure adequate security for the lender.
Table of content
Legal use & context
Nonrecourse loans are commonly used in real estate transactions and financing. They are particularly relevant in commercial real estate, where investors seek to limit their personal liability. In legal practice, these loans may come into play in bankruptcy proceedings, foreclosure actions, or when negotiating loan agreements. Users can manage some aspects of these transactions with legal templates available through US Legal Forms, drafted by experienced attorneys.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
(hypothetical example) A real estate investor takes out a nonrecourse loan of $300,000 to purchase a property valued at $500,000. If the investor defaults, the lender can only seize the property, even if the outstanding loan amount exceeds the property's sale price. If the property sells for $250,000, the lender cannot pursue the investor for the remaining $50,000.
State-by-state differences
Examples of state differences (not exhaustive)
State
Key Differences
California
Nonrecourse loans are common for certain types of property financing, especially in commercial real estate.
Texas
Texas has specific laws governing nonrecourse loans, particularly in relation to homestead properties.
Florida
Florida allows nonrecourse loans, but lenders may require higher collateral values due to market conditions.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Recourse Loan
A loan where the borrower is personally liable for repayment.
The lender can pursue the borrower for any outstanding balance after collateral is seized.
Secured Loan
A loan backed by collateral.
May or may not include personal liability for the borrower, depending on the loan terms.
Common misunderstandings
What to do if this term applies to you
If you are considering a nonrecourse loan, it is essential to understand the terms and implications fully. Consult with a financial advisor or legal professional to ensure it aligns with your financial goals. You can also explore US Legal Forms for templates and resources to help navigate the process. If your situation is complex, seeking professional legal assistance may be necessary.
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