Full-Recourse Debt: What It Means, How It Works

What Is Full-Recourse Debt?

Full-recourse debt is a type of secured debt that gives the lender rights to assets—beyond just the secured collateral specified in the loan contract—to cover the full repayment of the borrower’s loan obligations if they default on the loan.

In other words, loans with full-recourse provisions offer lenders additional remedies to pursue 100% of the outstanding loan amount, including legal action.

Understanding Full-Recourse Debt

When a borrower enters into a secured loan contract, the terms of the contract may be either full- or non-recourse. The provisions of a full-recourse loan give the lender rights to more assets than just the secured collateral specified in the contract.

Full-recourse debt mitigates risk for the lender. A lender may choose to integrate a full-recourse clause into the loan agreement if they believe that a secured asset likely will decrease.

Full-Recourse Loans and Mortgages

Full-recourse loan provisions are common in loan agreements that use a real estate property (i.e., mortgages) as collateral. For example, if a borrower were to default on their mortgage loan, then that lender would want to seize the property and foreclose.

However, if the property's resale value does not cover the entire amount due to the lender, then—provided the loan contract had a full-recourse provision—full-recourse rights would kick in. So mortgage bankers generally add full-recourse clauses to their loan agreements to protect themselves from the risk of a drop in collateral value.

Full-Recourse Lender Rights

A full-recourse provision grants the lender the right to seize any additional assets that the borrower may own and use them to recoup the remaining amount due to them. Depending on the terms of the full-recourse loan, lenders could gain the authority to tap a borrower’s bank accounts, investment accounts, and wages.

Full-Recourse  vs. Non-Recourse Debt

Full-recourse and non-recourse debt are associated with secured loans. The essential difference between a full-recourse and non-recourse loan has to do with the types of assets a lender can claim if a borrower fails to repay a loan.

Non-Recourse Debt

In contrast to full-recourse debt, non-recourse debt does not give a lender any rights to additional assets if a borrower defaults on a secured loan. In a non-recourse mortgage loan, the lender would not have rights to any assets beyond the real estate collateral.

Thus, non-recourse debt presents some collateral risk for the lender, as there is a chance that the collateral value could fall below a borrower’s repayment value. However, as a mortgage loan progresses, the collateral risk will decrease for the lender because greater portions of the loan will be paid off.

That the collateral value may decrease is usually an important risk consideration in the underwriting process. This risk is one reason that lenders typically have a loan-to-value ratio threshold for the amount of principal that they will issue to a secured borrower. Most lenders usually require a loan-to-value ratio of no more than 80%. Higher ratios can be approved but will typically require primary mortgage insurance (PMI).

The Bottom Line

Full-recourse loans are a big win for lenders but can be very risky for borrowers. If you purchase a property in a volatile market, you may have to dip into your personal accounts to cover the cost of the property when the market value drops. Read any full-recourse loan agreements very carefully to find out what assets are fair game in the event of a devaluation.