In the world of real estate investing there are two types of loans you can get to finance a property: recourse and nonrecourse.
Recourse
Recourse is the legal right to demand compensation or payment. Therefore, if you sign a recourse loan on a piece of property the lender will require that you be fully responsible to pay back the loan. In the event of a default or foreclosure the lender will first seize the collateral, in this case it would be the real estate, and can then get a deficiency judgement against you to repay what the real estate does not cover. They could garnish wages or levy accounts to collect what is owed.
A recourse loan allows you to get a low interest rate if you have good credit because the lender perceives it as less risky. If you have bad credit on the other hand, the lender might not give you the loan or charge a higher interest rate to compensate for the increased risk. It is always a good idea to be aware of your credit score before applying for a recourse loan.
Nonrecourse
Nonrecourse loans do not hold the borrower personally liable. Instead, the collateral or real estate is used to secure the loan. However, there are certain net worth and liquidity requirements for nonrecourse loans in acquiring multifamily assets. Anyone buying real estate would usually prefer to have a nonrecourse loan in most cases. If anything were to happen to the property resulting in default or foreclosure, the lender could seize the property and not be able to go after personal assets. The borrower would only be liable for the property.
This leaves the bank or lender vulnerable to loss which is why they vet the borrower and only give nonrecourse to someone with a lot of experience, net worth, and liquidity. Most traditional banks will not even offer nonrecourse loans. To do your first multifamily deal 5 units or more you may need to sign a personal guarantee or recourse loan with a bank, or partner with someone with the experience who would qualify for a nonrecourse loan.
Conclusion
Recourse loans are usually how most real estate investors start out. If you are going it alone and just getting started, you will likely have to start with a recourse loan. When you start scaling up or partnering with experienced real estate investors you can start qualifying for nonrecourse loans.
