Non Recourse Loan Interest Rates: A Complete Guide

Non recourse loans allow borrowers to walk away from a property without personal liability if they default. With a non recourse loan, the lender can seize the collateral securing the loan, but cannot pursue other assets owned by the borrower. As a result, non recourse loans present more risk to lenders, which is why they typically come with higher interest rates than standard recourse loans.

In this comprehensive guide we’ll explain everything you need to know about non recourse loan interest rates. including

• What is a non recourse loan?
• How non recourse loan interest rates are determined
• Factors that affect non recourse loan rates
• Average interest rates for non recourse loans
• Non recourse loan interest rates vs recourse loans
• How to get the best non recourse loan rate

What is a Non Recourse Loan?

A non recourse loan is a loan where the borrower is not personally liable for repayment. With a standard recourse loan, if the borrower defaults, the lender can seize their assets and wages to recover losses.

With a non recourse loan, the lender can only seize the collateral used to secure the loan Common examples of non recourse loans include

• Mortgages in certain states like California and Arizona
• Commercial real estate loans
• Some equipment financing loans

The limited liability with non recourse loans comes with tradeoffs. Since lenders take on more risk, non recourse loans typically have stricter qualification requirements and higher interest rates. The higher rates help compensate lenders for the added default risk.

How Are Non Recourse Loan Rates Determined?

Interest rates on non recourse loans depend on a range of factors related to the perceived riskiness of the loan Key factors lenders consider include

Loan-to-Value (LTV) Ratio – The ratio comparing the size of the loan to the appraised value of the collateral. The higher the LTV, the riskier the loan.

Credit Score – Borrowers with higher credit scores are seen as less risky. Non recourse loans usually require a minimum credit score of 680.

Debt-to-Income (DTI) Ratio – The percentage of gross monthly income devoted to total monthly debt payments. The higher the DTI, the higher the interest rate.

Type of Collateral – Interest rates vary based on the type of asset used as collateral. Low-risk assets like owner-occupied homes may qualify for lower rates.

Market Conditions – Interest rates tend to rise when the perceived risks in the economy and lending markets increase.

Lenders use these factors to assign a risk grade to the loan. The higher the risk, the higher the interest rate to compensate the lender.

Factors That Affect Non Recourse Loan Interest Rates

Many factors determine the specific interest rate offered on a non recourse loan. Here are some of the most important ones:

Credit Score – Borrowers with higher credit scores are seen as less risky. Expect at least a 100 basis point difference between rates for borrowers with a 700 credit score compared to a 720 score.

Down Payment – Loans with a higher down payment have a lower LTV ratio and qualify for better rates. A 40% down payment can save over 0.5% versus a 20% down payment.

Debt-to-Income Ratio – Having a DTI ratio below 36% can qualify borrowers for the lowest rates. As DTI rises, so do interest rates.

Loan Term – Shorter loan terms tend to have lower interest rates. The difference between a 15-year and 30-year mortgage can be 0.5% or more.

Prepayment Penalties – Agreeing to prepayment penalties can reduce interest rates, sometimes by more than 1%.

Property Type – Loans on owner-occupied homes qualify for better rates than investor properties or vacation homes.

Loan Program – Certain niche loan programs like fix-and-flip loans or interest-only loans have higher rates to offset risks.

Loan Amount – Loans for less than $100,000 often have interest rates up to 0.5% higher than jumbo loans over $1 million.

By optimizing these factors, borrowers can potentially save 1% or more on their non recourse loan interest rate.

Average Interest Rates on Non Recourse Loans

Given their risks, non recourse loans typically carry interest rates at least 0.5 to 1% higher than comparable recourse loans. Here are some average current rates:

• Non recourse mortgages – 4.5% to 6% for a 30-year fixed-rate loan

• Non recourse commercial loans – 6% to 8% for a 5 to 10-year loan

• Non recourse equipment financing – 7% to 13% depending on collateral type

To compare, here are average rates for conventional recourse loans:

• Recourse mortgages – 3.5% to 4.5% for a 30-year fixed-rate loan

• Recourse commercial loans – 4% to 6% for a 5 to 10-year loan

• Recourse equipment financing – 4% to 9% depending on collateral type

These numbers illustrate the interest rate premium charged for non recourse loans across different asset classes. The actual rate offered will depend on the borrower’s specific qualifications and financial profile.

Non Recourse Loan Rates vs. Recourse Loans

The interest rate difference between recourse and non recourse loans can be significant. For example:

• A $500,000 commercial property loan may charge 5% for a recourse loan but 7% for a non recourse loan. That equates to $10,000 more in annual interest with the non recourse option.

• A borrower with a 720 FICO score may pay 4.125% for a recourse mortgage but 5% for a non recourse mortgage on the same property. Over 30 years, the higher non recourse rate would cost over $60,000 more in total interest.

While recourse loans allow lenders to pursue assets beyond the collateral, non recourse loans offer protection against personal liability. That benefit merits paying a moderately higher interest rate for some borrowers. However, the interest premium can be substantial, so borrowers should weigh the pros and cons closely when choosing between loan types.

How to Get the Best Non Recourse Loan Interest Rate

Given the often sizable interest rate premiums charged, it pays to shop around and negotiate to get the lowest possible non recourse loan rate. Here are some tips:

• Get quotes from multiple lenders – Compare both online lenders and local banks or credit unions to find the most competitive rate.

• Ask about discounts – Many lenders offer rate discounts for auto-pay, larger loan amounts, or prepayment penalties.

• Improve your credit – Boosting your credit score and minimizing debts can qualify you for the lowest rates.

• Make a larger down payment – Putting down 20% or more equity on the collateral can reduce rates significantly.

• Shorten the loan term – Opt for a 15-year loan over a 30-year loan to get a lower rate.

• Use collateral that holds value – Assets like owner-occupied homes tend to get better rates than luxury cars or special use properties.

• Consider recourse loans – Weigh whether the savings from lower recourse loan rates outweigh the liability protection of a non recourse loan.

While non recourse loan rates run higher, taking these steps can help you secure the most favorable interest rate possible given your situation. Compare all your options to make the financing choice that best aligns with your needs and budget.

The Bottom Line

Non recourse loans provide the benefit of limiting personal liability in the event of default. But that benefit comes at the cost of higher interest rates, often 0.5% to 1% higher than comparable recourse loans.

Many factors affect non recourse loan rates, especially credit score, down payment percentage, and debt-to-income ratio. Improving those factors before applying for a non recourse loan can help borrowers qualify for the lowest available interest rates.

While non recourse loans make sense for some borrowers, they are not right for everyone. Be sure to weigh the pros and cons against alternative loan options like recourse loans to make the best possible financing decision for your situation.