What Is Recourse Loan?
When you default on a recourse loan, the lender forecloses and sells the property. If the sale doesn't cover what you owe, they can get a deficiency judgment and go after your other real estate, bank accounts, wages, and personal assets. That's recourse. Most residential mortgages and many commercial loans are recourse. Non-recourse limits the lender to the property—they take it and that's it. Recourse exposes you to full personal liability. Asset protection strategies (LLCs, trusts, insurance) can help, but they're not a substitute for not defaulting. Understand what you're signing: a personal guarantee on a commercial loan makes it recourse.
A recourse loan is financing where the lender can pursue the borrower's personal assets—beyond the collateral property—to satisfy a deficiency if the foreclosure sale doesn't cover the full debt.
At a Glance
- What it is: Loan where lender can pursue personal assets for a deficiency
- Default outcome: Foreclosure plus deficiency judgment
- Common in: Residential mortgages, small commercial loans
- Contrast: Non-recourse limits lender to the property
- Protection: Asset protection structures, but limited
How It Works
The deficiency scenario
You have a recourse loan on a rental in Las Vegas. Balance: $280,000. You default. The lender forecloses. The property sells for $240,000. Deficiency: $40,000. The lender sues you for the $40,000. They can garnish your wages, levy your bank account, and lien your other properties. You're personally liable for the shortfall.
Why most loans are recourse
Lenders prefer recourse because it gives them more recovery options. Residential mortgages are almost always recourse—Fannie, Freddie, FHA, VA, conventional. Small commercial loans (under $5–10M) are typically recourse. Non-recourse is the exception, reserved for larger institutional deals with strong sponsors.
Personal guarantee
On commercial loans, the personal guarantee is what makes it recourse. You sign a guarantee: "I personally promise to pay this debt." The lender can pursue you if the entity (LLC, etc.) doesn't pay. Some guarantees are "full recourse"—you're on the hook for everything. Others are "limited" or "carve-out" guarantees—you're only liable for specific bad acts (fraud, environmental). Read the guarantee.
State anti-deficiency laws
Some states limit deficiency judgments for certain loan types. California and Arizona, for example, have anti-deficiency rules for purchase-money mortgages on 1–4 unit residential properties. The lender can foreclose but can't pursue a deficiency. That's statutory protection, not contractual non-recourse. Rules vary by state and loan type. Consult a local attorney.
Real-World Example
Greg has a recourse commercial loan on an 8-unit in Milwaukee. He personally guaranteed it. The market softens; he loses tenants. He can't cover debt service. He hands the keys to the lender. Foreclosure sale: $520,000. Loan balance: $580,000. Deficiency: $60,000. The lender obtains a deficiency judgment and goes after Greg. They garnish his W-2 income, levy his savings account, and put a lien on his primary residence. Greg loses the rental and $60,000 from his personal assets. If the loan had been non-recourse, he would have lost the property but kept his other assets.
Pros & Cons
- Lenders offer better terms (lower rate, higher LTV) for recourse
- More financing options—recourse is the default
- Personal guarantee may be required for smaller deals
- Access to capital when non-recourse isn't available
- Full personal liability for deficiency
- Foreclosure can cost you more than the property
- Asset protection is limited against contractually agreed recourse
- Stress and legal exposure in default
Watch Out
Know what you're signing: The personal guarantee is in the loan documents. Don't skim it. Understand the scope—full recourse vs carve-out only.
LLCs don't protect against guarantees: If you personally guarantee a loan for your LLC, the guarantee pierces the LLC. The lender can pursue you. The LLC protects you from other liabilities (tenant lawsuits, etc.) but not from your own guarantee.
Cross-collateralization: Some commercial loans cross-collateralize—one loan secures multiple properties. Default on one, and the lender can go after all. Read the security documents.
Bankruptcy: Filing bankruptcy can discharge a deficiency judgment in a Chapter 7, but it has serious consequences. It's a last resort, not a planning tool. And if you have significant assets, the bankruptcy trustee may liquidate them.
The Takeaway
Recourse loans are the norm for residential and many commercial loans. The lender can pursue your personal assets for a deficiency. Personal guarantees make it explicit. Asset protection helps with other risks but doesn't eliminate recourse you've contractually agreed to. Underwrite carefully, maintain reserves, and know what you're on the hook for.