ADVANTAGES OF NON-RECOURSE FINANCING
Many people probably understand the concept of a secured loan. To put it in the most simple terms, the lender hands over some cash and the borrower puts up property as collateral against the possibility of default. These loans will often include a personal guarantee as well, and if default occurs, the lender has the ability to seize, in some cases, almost any and all property of the borrower to satisfy the debt. In other words, the borrower is personally responsible for the loan, with little protection available. At the other extreme is an unsecured loan, where the borrower does not pledge specific property as collateral. Not surprisingly, unsecured loans are normally for smaller amounts, and though a lender may still recover in the event of a default or bankruptcy, odds are they can expect a less than full recovery. Unsecured loans provide very little protection for the lender. Somewhere in the middle exists non-recourse financing, allowing some protection for both the lender and the borrower.
Non-recourse financing refers to a loan secured by a specific pledge of collateral, for instance, a piece of real estate. In the event of a default under non-recourse financing, the lender has the ability to reclaim the collateral, but the recovery is limited to the specified collateral, alone. In essence, non-recourse financing offers some protection to both parties and allows an option to fully secured and completely unsecured loans.
Non-recourse financing does offer advantages to both parties where fully secured loans may not be available and unsecured loans simply will not be considered by the lender. These advantages allow deals to close where an agreement may not otherwise be reached. Borrowers are able to receive non-recourse financing without the risk of losing everything they own. Unforeseen circumstances that may lead to default means only that the property pledged as collateral is at risk. Other property of the borrower is safe from the grasp of the lender of the non-recourse loan.
So what about lenders? Lenders generate protection by carefully selecting the loans and assets that will qualify for non-recourse financing. In most cases, real estate or real property will be the only assets accepted for a non-recourse loan. In addition, non-recourse financing will usually have a 80% to 90% loan to value ratio, meaning that the loan will only be for 80% to 90% of the asset used as collateral. In some cases, lenders may use a higher interest rate and, of course, they always have the collateral should a problem with repayment arise.
Hanover Companies pairs non-recourse financing with Self-Directed IRA investment property to offer our clients additional opportunities for real estate investing. Self-directed IRA’s allow the owner of a retirement account to choose the property investments to include in the account. Though a trustee or custodian will be used in a self-directed IRA to prepare paperwork and ensure that purchases are made properly, the owner will not be limited by the choices offered by the trustee or custodian.
To take control of your retirement and learn more about non-recourse financing and self-directed IRA’s, contact Hanover Companies today.
NOTE: Hanover Companies is not a mortgage lender or loan originator. The financer of non-recourse financing may be a bank, individual or private mortgage or deed.