One of the advantages of hard money loans is that the private money lenders who underwrite them are not bound by the same rigid federal restrictions that govern banks and other institutional lenders. This series of blogs will explore the types of out-of-the-box loans in which private capital lenders specialize and highlight how hard money loans can be a crucial tool for the savvy commercial real estate investor. There are eight common types of loans that private money lenders will underwrite which traditional lenders like banks or life insurance companies are not willing to consider. These will be explored in detail over eight blogs: Cash-Out Bridge Loans, Loans to Foreign Nationals, Marijuana-Tenanted Properties, Note-Purchase Loans, Non-Recourse Loans, Vacant Land Loans, Tight Timeframe Lending, and Beyond the Typical Requirements.

What Is a Non-Recourse Loan?

A non-recourse loan is one for which the lender doesn’t require personal guarantees for the repayment of the loan. A personal guarantee allows the lender to go after funds from  a Guarantor of the loan (the Borrower in commercial real estate loans is normally an LLC)   in the event that value of a property in foreclosure on the property may not  cover the principle of the loan with its accrued interest and legal costs. However, in the event that a default occurs with a non-recourse loan, the lender can only reclaim the property that secured the loan, and the borrower is protected from having to pay out any additional funds.

Who Provides Non-Recourse Loans?

Life insurance companies and other institutional, non-bank lenders will often finance loans without recourse, but these loans tend to be much larger than the typical commercial real estate loans that one would apply for at a bank. Hard money lenders are more willing to consider financing non-recourse loans in smaller amounts than life insurance companies. Private lenders counter the higher risk aspects of a non-recourse loan by requiring carve-out provisions. These provisions allow for the lender to pursue a guarantor’s personal assets in certain situations such as perpetrating fraud or misrepresentation, filing for bankruptcy, failing to maintain required insurance or pay property taxes, or committing a criminal act.

How Is the Foreclosure Process Different for Non-Recourse Loans?

In order to foreclose on a property in Colorado, a lender must submit a bid to the Public Trustee before the foreclosure can move forward. If the lender’s bid matches the loan principal and any delinquent interest, then it does not matter whether the loan allows recourse because there is no shortfall for the lender to pursue. However, if the lender decides that the property is not worth the amount owed to them, then they can submit a bid below the combined amount of the loan principal and any delinquent interest. This is when a non-recourse loan can protect a borrower or guarantor from being pursued by the lender to pay back any deficiency out of their personal funds (as long as none of the carve-out provisions have been violated).

Non-recourse loans are just one example of the flexibility and willingness of private money  lenders to work with their borrowers to find creative, outside-the-bank lending solutions to high-risk financing problems when conventional lenders often just say no. Check out the next blog in this series, Vacant Land Loans, for another example of how hard money loans can work for you.

For more information about Montegra’s non-recourse loan program, contact us at 303-377-4181 or loans@montegra.com.