Many assume that because a Debt Service Coverage Ratio (DSCR) loan qualifies based on the property’s income instead of personal finances, it must be non-recourse. This means their personal assets are protected if things go wrong.
The reality is more nuanced and advantageous than most investors realize. Most specialized DSCR loan programs, including theLender’s flagship products, are full recourse loans requiring a personal guarantee, which creates the assumption due to the asset-based nature of DSCR loans. This structure unlocks the flexibility, speed, and investor-focused features that make these loans powerful, far from being a drawback.
Understanding the difference between recourse and non-recourse loans is crucial for protecting and scaling your real estate portfolio. Grasping these concepts will make you a more informed and confident investor.
Understanding Recourse vs. Non-Recourse Loans
Before discussing DSCR loan specifics, let’s establish a foundation. The difference between these loan types comes down to one question: What assets can the lender pursue if you default? This distinction affects your risk exposure and loan terms.
What is a Recourse Loan?
A recourse loan allows the lender to seize the collateral property and pursue the borrower’s other assets if the property’s sale doesn’t cover the loan balance. In simple terms, you are personally liable for the entire debt, regardless of what happens to the property securing the loan.
Here’s a practical example: If you default on a $400,000 recourse loan, and the property sells for $350,000 at foreclosure, the lender can pursue you for the $50,000 shortfall by going after your bank accounts, other properties, wages, or personal assets. Your entire financial portfolio is at risk, not just the financed property.
With a recourse loan, your personal assets are at risk beyond the financed property.
What is a Non-Recourse Loan?
A non-recourse loan limits the lender’s remedies to the collateral property. If you default, the lender can foreclose on the property but cannot pursue your other personal assets. This is true even if the property’s sale doesn’t cover the full loan balance. The lender essentially “walks away” from any deficiency.
These loans are rare in the investment property space. Typically, they’re reserved for large commercial projects, borrowers with exceptional financial strength, or situations where the lender accepts higher interest rates and lower loan-to-value ratios to compensate for the increased risk. Non-recourse debt is more common in commercial real estate and large-scale development projects.
With a non-recourse loan, the only asset at risk is the financed property.
Are DSCR Loans Non-Recourse?
No, not all DSCR loans are non-recourse. Most DSCR loans from specialized lenders like theLender are full recourse loans. This is a critical distinction for real estate investors to understand before finalizing their financing strategy.
Why Investors Assume DSCR Loans Are Non-Recourse
The logic behind this misconception is understandable. DSCR loans qualify based on the property’s income stream rather than the borrower’s W-2 income, tax returns, or employment history, making it a purely commercial, asset-based transaction. The underwriting process focuses on rent rolls, property cash flow, and debt service coverage ratios, and it does not consider personal financial statements.
When investors use an LLC or other business entity to purchase the property for asset protection, this perception is reinforced. Many investors pursuing an LLC investment property loan assume that borrowing through a business entity automatically shields their personal assets. Unfortunately, this assumption overlooks a crucial component: the personal guarantee.
Why a Personal Guarantee is Standard for Investor Loans
The features that make DSCR loans attractive to investors, such as no tax returns, no W-2s, no employment verification, fast closing, require lenders to secure the loan differently. Traditional banks rely on personal income documentation and credit analysis. Specialized non-QM lenders like theLender can bypass these hurdles but need an alternative security.
Enter the personal guarantee, a written promise from the individual borrower (or LLC principals) to personally repay the debt if the business can’t. This agreement makes the loan a recourse obligation, regardless of the property’s title.
At theLender, our DSCR loan programs require a personal guarantee from the borrowing entity’s principals. This is a non-negotiable component of our lending process and represents standard practice throughout the non-QM lending space. Rather than viewing this as a limitation, savvy investors recognize it as the foundation for flexible underwriting and terms that traditional banks cannot offer.
This alignment of interests creates a true partnership that allows for the streamlined, investor-focused approach that makes DSCR loans powerful.
Investor-Focused Financing with a Personal Guarantee
The personal guarantee isn’t an obstacle. It’s the key to a streamlined and powerful way to finance investment properties. This recourse structure enables the lender to offer benefits impossible under traditional underwriting models, creating unique market opportunities.
Your Rental Income Qualifies You
Because you’re providing a personal guarantee, we can focus on the investment property’s cash flow potential. This shift in underwriting philosophy changes your approach to real estate financing.
To qualify, you don’t need W-2s, paystubs, tax returns, or employment verification. If the property’s expected rental income covers the mortgage payment and this is demonstrated through the Debt Service Coverage Ratio, you’re on your way to approval. This is the essence of our flagship NONI and NearNONI programs, designed for investors financing based on property performance rather than personal income documentation.
For All Investors, from First-Timers to Portfolio Pros
This financing model works for investors of all experience levels and portfolio sizes. We welcome first-time investors with a cash-flowing property who want to start building wealth through real estate, unlike lenders requiring extensive real estate experience.
The recourse structure provides the security to offer innovative products like our ‘theBlanket’ portfolio loan, which can finance 3-25 properties in a single transaction, for seasoned investors looking to scale rapidly. This portfolio financing is not possible without the additional security of personal guarantees.
Unmatched Flexibility for Modern Investing
The security of the personal guarantee allows the lender to offer flexibility that traditional banks cannot match, translating into real advantages for serious investors:
- Flexible Entity Vesting: Close your LLC, S-Corp, or Trust for maximum asset protection and tax benefits
- STR Income Maximized: We use advanced methods like AirDNA reports and market analysis to qualify your short-term rental income.
- Generous LTVs: Access up to 85% loan-to-value ratios on purchases, maximizing your leverage.
- No Income Sourcing: We don’t require extensive documentation or seasoning of large deposits.
- Speed to Close: Our streamlined process allows closing in as little as 30 days.
- Rate Lock Flexibility: Protect your rate while finding the perfect property
- Nationwide Lending: We lend in most states, providing geographic flexibility.
FAQs about DSCR Loans and Recourse
Q: Can I get a DSCR loan without a personal guarantee?
A: True non-recourse DSCR loans are rare in the non-QM investment property market. When they exist, they require massive down payments (40-50% or more), higher interest rates, and are for large commercial properties or borrowers with exceptional net worth. For typical 1-8 unit investment properties, the personal guarantee is standard.
Q: Does vesting in an LLC protect my personal assets from the loan?
A: Vesting in an LLC provides significant liability protection from operational risks like tenant lawsuits, slip-and-fall accidents, or other property-related claims. However, if you provide a personal guarantee on the loan, you are personally liable for the mortgage debt. The LLC protection and loan liability are separate concepts. The LLC protects you from third-party claims, but the personal guarantee makes you responsible for the loan regardless of the LLC structure.
Q: How is this different from a hard money loan?
A: While many hard money loans are recourse loans with personal guarantees, they come with much higher interest rates (10-15% or higher) and short terms (6-24 months). These loans are designed for quick transactions and exits. In contrast, theLender’s real estate investor loans offer competitive long-term financing with 30-year amortizations and rates similar to conventional loans, designed for buy-and-hold investors building long-term wealth.
Q: What happens in a worst-case default?
A: In the event of a default, the lender would follow legal procedures to foreclose on the property. If the sale proceeds are insufficient to cover the outstanding loan balance, costs, and fees, the personal guarantee allows us to seek repayment from the guarantor’s other assets. This is why the personal guarantee represents a serious commitment and this is why we only partner with serious, committed investors who understand and accept this responsibility.
Q: Can I limit my personal guarantee exposure?
A: The personal guarantee typically covers the full loan amount plus costs. Some borrowers ask about “limited guarantees,” but these are not standard in the DSCR loan market. The comprehensive guarantee enables flexible underwriting and attractive terms. You can manage your risk through insurance, conservative leverage ratios, and diversification across multiple properties.
Conclusion
So are DSCR loans non recourse? A clear NO for most specialized investor loan products today. At theLender, our DSCR loans are full recourse loans requiring personal guarantees. This is a feature, not a limitation.
This recourse structure is the foundation of a true lending partnership that allows us to bypass the bureaucratic hurdles of traditional financing while offering you the speed, flexibility, and leverage to build a substantial real estate portfolio. Instead of getting bogged down in personal income documentation, employment verification, and lengthy approval processes, we can focus on what matters: the property’s ability to generate cash flow and build wealth.
The personal guarantee shouldn’t intimidate you. It reflects your confidence in your investment strategy and property selection. It’s a commitment that aligns our interests and enables a level of service and flexibility unavailable through traditional channels. When you’re ready to finance like an investor, not a homeowner, you’re ready to work with a lender that understands your goals.