California Real Estate Broker ExaminationFinancingMedium
A real estate investor is considering a loan for a commercial property where the lender will not seek a deficiency judgment against the borrower personally if the proceeds from a foreclosure sale are insufficient to cover the outstanding debt. This type of loan is known as a:
- ANon-recourse loan
- BBlanket loan
- CHard money loan
- DRecourse loan
Show answer & explanationAnswer & explanation
Correct answer: A. Non-recourse loan
In a non-recourse loan, the borrower is not personally liable for the debt. If the collateral (the property) is sold in foreclosure and doesn't cover the full loan amount, the lender cannot pursue the borrower for the remaining deficiency.
Why the other options are wrong
- B. A blanket loan covers multiple properties under a single mortgage, which is a different concept from liability for deficiency.
- C. A hard money loan is a short-term loan based primarily on the value of the collateral, often with high interest rates, but it can be recourse or non-recourse.
- D. A recourse loan allows the lender to pursue the borrower for any deficiency after a foreclosure sale.
Non-Recourse Loan
A type of loan where the lender's recovery is limited to the collateral pledged, and the borrower is not personally liable for any deficiency if the sale of the collateral does not cover the full debt.
- No personal liability for the borrower
- Lender's recovery limited to the collateral
- Common in commercial real estate and some government-backed loans
Memory trick: Recourse = Re-catch the borrower. Non-Recourse = No re-catch.