Non-recourse multi-family loans are becoming increasingly popular as commercial mortgage financing. These loans offer many benefits, including the ability to avoid personal liability in the event of default and foreclosure.
While multi-family properties can be an excellent investment, they also come with a higher risk. Fortunately, non-recourse loans can help mitigate this risk by offering borrowers protection from personal liability.
What Are Non-Recourse Multi-Family Loans and How Do They Work?
Non-recourse loans are commercial mortgage financing where the lender cannot go after the borrower personally if the loan defaults. This loan is typically only available to borrowers with solid credit and a substantial down payment, as the lender is taking on more risk.
Commercial mortgage lenders view non-recourse loans as somewhat riskier than traditional recourse loans, which is why the former comes with higher interest rates than other financing options. Still, these types of loans can be a good option for borrowers who meet the criteria.
Unlike conventional multi-family loans, non-recourse loans are secured only by real estate. If the borrowers default on the loan, the lender cannot seize their personal property and garnish their wages. As a result, borrowers do not have to risk losing their homes or other assets to cover the debt.
Because the lender cannot go after the borrower personally if the loan goes into default, they may be more likely to foreclose on the property to recoup their losses.
However, if the property is worth more than the loan balance, the lender may be willing to work with the borrower to restructure the loan to avoid foreclosure.
What Are the Different Types of Non-Recourse Financial Instruments?
When it comes to commercial mortgage financing for a multi-family property, there are several ways to secure a non-recourse multi-family loan. From commercial mortgage-backed security (CMBS) financing to Fannie Mae and Freddie Mac, real estate investors can take advantage of different non-recourse financial instruments.
Housing and Urban Development
Non-recourse multi-family loans from Housing and Urban Development (HUD) are another way to finance multi-family real estate. While HUD is more likely to fund projects that provide affordable housing, affordable units are not a prerequisite for financing. HUD financing is available for both affordable and market-rate developments.
Its non-recourse, long-term financing offers competitive rates and low debt-coverage requirements. Depending on the type of development, a HUD loan could take as little as six months to process, whereas a typical bank loan can take much longer.
The HUD loan may be more costly to originate and offer a more extended amortization period, but the interest rate and payments are typically lower.
Fannie Mae and Freddie Mac
Non-recourse multi-family loans are designed to help borrowers purchase or refinance multi-family properties. You can use these loans for conventional apartments, student housing, manufactured housing communities, and other property types.
Fannie Mae and Freddie Mac offer various non-recourse multifamily loans to help borrowers finance the purchase or refinance of their multi-family properties.
CMBS Financing
CMBS financing is an alternative to traditional multi-family mortgages, providing many benefits for commercial real estate investors, including leverage and flexible options. Depending on the lender, the loan amortization period can extend between 25 to 30 years.
What Is the Difference Between a Non-Recourse and Recourse Multi-Family Loan?
A non-recourse multi-family loan is a commercial mortgage loan where the borrower is not personally liable for repayment. This type of loan is typically used for purchases of multi-family investment properties. If the property is sold or foreclosed upon, the lender can only go after the property — not the borrower’s other assets.
On the other hand, a recourse loan is a commercial mortgage loan where the borrower is personally liable for repayment. If the property is sold or foreclosed upon, the lender can go after the borrower’s other assets to recoup their losses. Recourse loans are typically used for owner-occupied properties, such as office buildings or retail stores.
What Are the Benefits of Non-Recourse Multi-Family Loans?
Non-recourse loans are commercial mortgage financing that offers borrowers more protection than a recourse loan. With a recourse loan, the lender could go after the borrower’s other assets if they default on the loan.
On the other hand, in a non-recourse loan, the lender can only go after the property if the borrower defaults. This makes non-recourse loans much less risky for borrowers and gives them peace of mind knowing that their assets are safe.
Multi-family properties can be good candidates for non-recourse loans. These properties tend to hold their value better than other types of commercial real estate, making them less risky for lenders.
And because multi-family properties often generate income from rent, they can offer borrowers a steady stream of revenue that can help make loan payments.
In general, non-recourse multi-family loans are ideal for experienced commercial real estate investors looking to finance the purchase or refinance of an investment property.
These loans can be used for properties with multiple units and offer many benefits, including flexible terms and the ability to avoid personal liability in the event of a foreclosure.
What Are the Risks of Non-Recourse Multi-Family Loans?
There are several risks associated with non-recourse multi-family loans that borrowers should be aware of before signing on the dotted line. First and foremost, if the property is sold or foreclosed upon, the borrower could still be personally liable for any outstanding debt owed to the lender.
The borrower will be responsible for covering the difference if the property is sold for less than the outstanding loan balance. Additionally, the borrower will still be required to repay the loan in full if the property is damaged or destroyed.
Another risk is that certain non-recourse loans have pre-payment penalties, particularly CMBS loans. For example, if the borrower decides to sell or refinance the property before a certain period has elapsed, they could be required to pay a penalty fee to the lender. Pre-payment penalties can add up quickly and make it difficult to promptly sell or refinance a property.
Lastly, many lenders require borrowers to maintain adequate property insurance coverage. If something happens and the property is not adequately insured, the lender may demand repairs at the borrower’s expense or even foreclose on the property.
While non-recourse multi-family loans can offer some advantages, significant risks are also involved. Borrowers should consider all of these factors before entering into an agreement.
How To Get a Non-Recourse Multi-Family Loan
Multi-family loans are commercial mortgage financing options that you can use to purchase or refinance a property with five or more units. Non-recourse multi-family loans are available from government agencies and private financial institutions.
Government-sponsored institutions may not make the loans directly but purchase them from a seller or servicer. These agencies often offer lower interest rates and longer terms, making them attractive for investors looking to maximize their leverage.
To qualify for a non-recourse multi-family loan, the borrower should have a minimum down payment of 25% of the purchase price. The borrower ideally also has a minimum credit score of 60 and can demonstrate an ability to make monthly debt payments. The property must be located in an eligible market and meet all other underwriting criteria.
Generally, non-recourse lenders prefer borrowers aiming for properties located in good neighborhoods. The property should also have a high potential for upside and produce ample rental income.
The Bottom Line
Non-recourse multi-family loans are excellent for commercial mortgage financing, especially if you’re looking for lower-risk investment options. Offering protection from personal liability, you should consider the different non-recourse multi-family loan options and find the most suitable choice for your needs.
