DSCR Loan Recourse vs Non-Recourse: Personal Guarantees, Carve-Outs, and What's Really at Stake

When investors ask me what separates a good DSCR loan from a great one, the answer usually isn't rate or LTV — it's recourse structure. Whether your DSCR loan is recourse or non-recourse fundamentally changes your risk exposure as an investor, and most borrowers don't fully understand the difference until something goes wrong.

Here's the reality: the vast majority of DSCR loans marketed as "non-recourse" aren't truly non-recourse. They contain carve-outs — specific exceptions that can convert a non-recourse loan into full personal liability if triggered. Understanding these carve-outs isn't optional; it's essential to protecting the assets you've worked to build.

Let me break down exactly what recourse and non-recourse mean in DSCR lending, what the carve-outs actually say, and how to structure your loans to minimize personal exposure.

Recourse vs. Non-Recourse: The Basic Framework

Recourse Loans

With a recourse loan, the lender can pursue your personal assets if the property's sale doesn't cover the outstanding loan balance after a default and foreclosure.

Example: You default on a $200,000 DSCR loan. The lender forecloses and sells the property for $170,000 (after costs). The remaining $30,000 deficiency? With a recourse loan, the lender can come after your bank accounts, other investment properties, vehicles, and any other non-exempt assets to recover that $30,000.

In practice, this means signing a personal guarantee — a legal document where you personally promise to repay the loan if the property and borrowing entity can't.

Non-Recourse Loans

With a non-recourse loan, the lender's recovery is limited to the collateral property itself. If the property sells for less than the loan balance after foreclosure, the lender absorbs the loss. They cannot pursue your personal assets for the deficiency.

Same example: You default on a $200,000 non-recourse DSCR loan. The lender forecloses, sells for $170,000, and eats the $30,000 loss. Your personal assets and other properties are protected.

This sounds like a no-brainer — why would anyone choose recourse? Because non-recourse comes with trade-offs that significantly affect deal economics and aren't always disclosed clearly.

The Real Cost of Non-Recourse DSCR Loans

Non-recourse isn't free. Lenders price the additional risk into the loan terms:

Interest Rate Premium

Non-recourse DSCR loans typically carry a 0.25% to 0.75% higher interest rate than comparable recourse loans. On a $250,000 loan, a 0.50% rate premium adds approximately $104/month or $1,248/year to your debt service. Over a 5-year hold, that's $6,240 in additional interest.

Lower Maximum LTV

Lenders reduce their exposure on non-recourse loans by capping LTV lower:

• Recourse DSCR: Up to 80% LTV
• Non-recourse DSCR: Typically capped at 70-75% LTV

That 5-10% LTV difference means more cash out of your pocket at closing. On a $300,000 property, the difference between 80% and 75% LTV is $15,000 in additional down payment.

Higher DSCR Minimums

Some lenders require a higher minimum DSCR for non-recourse loans:

• Recourse: 1.00 DSCR minimum
• Non-recourse: 1.15 or 1.20 DSCR minimum

This effectively excludes borderline deals from non-recourse eligibility.

Stricter Reserve Requirements

Non-recourse loans often require 9-12 months of PITIA reserves compared to 3-6 months for recourse. This ties up more of your liquid capital.

Higher Minimum Loan Amounts

Many lenders only offer non-recourse on loans above $150,000 or $200,000. Smaller deals may only qualify for recourse structures.

Carve-Outs: The Fine Print That Can Make Non-Recourse Meaningless

Here's the section every DSCR borrower needs to read carefully. Non-recourse loans contain "carve-out" provisions — specific acts or events that, if triggered, convert the loan from non-recourse to full personal recourse. These are sometimes called "bad boy" carve-outs because they're triggered by bad behavior.

Carve-outs exist to prevent borrowers from abusing the non-recourse protection. The theory: non-recourse protects you from market risk (property value declines, unexpected expenses), but it shouldn't protect you from fraud, negligence, or intentional harm to the lender's collateral.

Common Carve-Out Triggers

Here are the carve-outs you'll find in virtually every non-recourse DSCR loan agreement:

1. Fraud or Misrepresentation

If you provide false information on the loan application — inflated income, fabricated leases, misrepresented property condition — the non-recourse protection evaporates. This is the most straightforward carve-out and the one most investors understand intuitively.

How to avoid it: Be truthful on your application. Don't fabricate lease documents. Don't misrepresent the property's condition or your financial situation. This sounds obvious, but lenders report that misrepresentation is the most commonly triggered carve-out.

2. Voluntary Bankruptcy Filing

If the borrowing entity (your LLC) files for voluntary bankruptcy, many non-recourse agreements treat this as a carve-out trigger. The logic: bankruptcy automatically stays foreclosure proceedings, delaying the lender's ability to recover its collateral. By filing bankruptcy, you're using the legal system to prevent the lender from exercising its rights under the loan.

Key distinction: An involuntary bankruptcy (filed by creditors against you) typically doesn't trigger this carve-out. The trigger is the voluntary filing — a decision you or your entity makes.

How to avoid it: If your investment property loan is in trouble, talk to the lender about workout options (loan modification, forbearance, deed-in-lieu of foreclosure) before considering bankruptcy for the entity. A deed-in-lieu is particularly effective — you transfer the property to the lender, they cancel the debt, and your non-recourse protection remains intact.

3. Environmental Contamination

If the property causes environmental contamination (underground storage tank leak, asbestos release, chemical dumping), the remediation costs can become your personal liability under the carve-out, even on a non-recourse loan.

How to avoid it: Conduct a Phase I Environmental Site Assessment before purchasing any property with environmental risk factors (gas stations, dry cleaners, industrial buildings, properties with underground storage tanks). For standard residential rental properties, this is rarely an issue.

4. Waste or Intentional Property Damage

"Waste" in legal terms means allowing the property to deteriorate to the point where the lender's collateral is materially impaired. This includes:

• Stripping the property of fixtures, appliances, or systems
• Allowing severe deferred maintenance that damages structural integrity
• Demolishing structures without lender approval
• Removing or damaging landscaping that affects property value

How to avoid it: Maintain the property. If you're experiencing financial difficulty and can't afford repairs, communicate with your lender. Intentional neglect or stripping is the trigger — genuine inability to maintain during a temporary hardship is typically not.

5. Unauthorized Transfer of the Property

Most DSCR loans include a "due-on-sale" clause preventing you from transferring the property without lender consent. If you sell, transfer, or encumber the property in violation of this clause, the carve-out may be triggered.

Common violation: Transferring the property from the borrowing LLC to a different LLC, a trust, or a family member without lender approval. Even if the transfer is for estate planning or asset protection purposes, doing it without consent can trigger the carve-out.

How to avoid it: Get written lender approval before any ownership or title changes. Most lenders will approve reasonable transfers (to a family trust, between commonly-owned entities) — they just want to know about it first.

6. Unauthorized Subordinate Financing

Taking out a second mortgage, HELOC, or other lien against the property without lender consent is a carve-out trigger. The lender's non-recourse protection is based on their first-lien position with sufficient equity cushion. Additional debt erodes that cushion.

How to avoid it: Don't place additional liens on the property without lender approval. If you need to access equity, refinance the first mortgage or request a subordination agreement.

7. Misappropriation of Rents or Insurance Proceeds

If you collect rent or insurance proceeds (from a property damage claim) and don't apply them to property expenses or debt service, some carve-outs treat this as misappropriation. In other words, if the property generates income and you pocket it while defaulting on the loan, you lose your non-recourse protection.

How to avoid it: If you're in default or approaching default, continue applying rental income to property expenses and mortgage payments. Don't redirect property income to personal use while the property is in distress.

How Carve-Outs Are Enforced

Carve-outs are enforced through litigation. If the lender forecloses on a non-recourse loan and believes a carve-out has been triggered, they'll sue you personally for the deficiency. The burden of proof is typically on the lender to demonstrate that the carve-out was triggered.

Practical reality: Lenders don't trigger carve-outs lightly. Litigation is expensive and uncertain. For a $30,000 deficiency, most lenders won't spend $50,000 in legal fees to pursue a carve-out claim. Carve-out enforcement is most common in larger commercial loans ($1M+) where the deficiency justifies litigation costs.

For typical DSCR loan sizes ($150,000-$500,000), carve-out enforcement is relatively rare — but it does happen, particularly for fraud and voluntary bankruptcy triggers. Don't count on the economics of litigation to protect you.

The Personal Guarantee: What You're Actually Signing

If your DSCR loan is recourse, you'll sign a personal guarantee — also called a guaranty agreement. Here's what it typically includes:

Full Guaranty vs. Limited Guaranty

Full guaranty: You personally guarantee the entire loan amount plus interest, fees, and collection costs. If the borrowing entity defaults, the lender can pursue you for everything.

Limited guaranty: You personally guarantee only a portion of the loan — typically 25-50%. This is less common in DSCR lending but exists with some lenders.

Continuing Guaranty

Most personal guarantees are "continuing" — meaning they survive loan modifications, extensions, and even partial repayment. You can't escape the guarantee by modifying the loan terms. It stays in effect until the loan is fully repaid or the guarantee is formally released.

Waiver Provisions

The guarantee typically includes waivers of your legal rights as a guarantor:

• Waiver of notice: The lender doesn't have to notify you before taking action against you.
• Waiver of subrogation: You can't step into the lender's shoes and take action against the borrowing entity after you pay.
• Waiver of marshaling: The lender can pursue your assets in any order they choose — they don't have to exhaust the property collateral first.

These waivers are standard and rarely negotiable at DSCR loan sizes. Understanding them helps you appreciate the full scope of what a personal guarantee means.

Choosing Between Recourse and Non-Recourse

When Recourse Makes Sense

1. You're early in your investing career with limited assets. If your net worth is primarily tied up in the investment property itself, non-recourse protection has limited practical value — there's not much else for the lender to pursue.

2. The rate and LTV difference significantly affects your deal economics. If 0.50% higher rate and 5% lower LTV make the difference between positive and negative cash flow, recourse may be the practical choice.

3. You're confident in the property's value stability. In strong markets with limited downside risk, the likelihood of a deficiency after foreclosure is low, making the non-recourse protection less valuable.

4. The loan is small. On a $100,000 loan at 75% LTV, the maximum potential deficiency is manageable for most investors. The cost of non-recourse protection may exceed the risk it mitigates.

When Non-Recourse Is Worth the Premium

1. You have significant personal assets to protect. If you have a $2M portfolio of investment properties, personal savings, and other assets, non-recourse on each individual loan prevents one bad deal from threatening your entire net worth.

2. You're investing in volatile or uncertain markets. If property values could decline 20-30%, non-recourse protects you from the downside scenario where the property is worth less than the loan balance.

3. You're scaling rapidly. As your portfolio grows, your aggregate debt grows with it. Non-recourse on each loan limits your total personal exposure to carve-out scenarios rather than full loan amounts.

4. The entity structure matters for liability isolation. If you're using separate LLCs for each property as part of an asset protection strategy, recourse loans undermine that structure by creating personal liability that pierces through the entity.

5. The loan is large. On a $500,000+ loan, the potential deficiency after foreclosure could be $100,000+. Non-recourse protection is more valuable when the potential downside is larger.

Structuring Your DSCR Loans for Maximum Protection

The Entity Stack

The optimal structure for non-recourse DSCR lending:

1. Holding LLC: Each property (or small group of properties) held in a separate LLC
2. Manager: You or a management LLC serve as the manager of each property LLC
3. Guarantor: You personally sign the non-recourse carve-out guaranty (this is unavoidable — lenders require a human guarantor for carve-outs)
4. Insurance: Each entity carries adequate liability and property insurance

This structure ensures that:

• The non-recourse loan is made to the LLC
• Your personal exposure is limited to carve-out triggers
• Each property's liability is isolated from other properties
• A problem with one property doesn't create a domino effect

Negotiating Better Carve-Out Terms

On larger DSCR loans ($500,000+), you may have some negotiating leverage on carve-out terms:

• Narrower carve-out triggers. Push for carve-outs limited to fraud and voluntary bankruptcy only, excluding waste and environmental triggers.
• Carve-out caps. Negotiate a maximum dollar amount for carve-out liability — for example, carve-out exposure capped at 25% of the original loan amount.
• Sunset provisions. Request that certain carve-outs expire after a specified period (e.g., the environmental carve-out sunsets after 5 years if no contamination is discovered).
• Springing recourse only. Some loans can be structured where recourse only "springs" (activates) upon specific trigger events, rather than being embedded from day one.

On standard DSCR loans under $500,000, carve-out terms are generally non-negotiable — they're baked into the lender's standard documents. But it's always worth asking.

Real Scenario: When Non-Recourse Saved an Investor

The Situation

An investor purchased a fourplex for $380,000 with a non-recourse DSCR loan at 75% LTV ($285,000 loan). Two years later, a major employer in the town shut down, unemployment spiked, and the investor lost three of four tenants. The remaining tenant was paying below-market rent.

The property's value dropped to an estimated $260,000. The investor couldn't cover the mortgage, couldn't find tenants, and was burning through reserves.

The Outcome

The investor contacted the lender and negotiated a deed-in-lieu of foreclosure — transferring the property to the lender in exchange for full release of the debt. Because the loan was non-recourse, the lender had no claim against the investor's other assets despite the $25,000+ deficiency.

The investor lost the property and their initial $95,000 investment, but protected their other four rental properties, their personal savings, and their family home. If the loan had been recourse, the lender could have pursued a $25,000+ deficiency judgment, potentially forcing the sale of other assets to satisfy it.

The cost of non-recourse protection on this deal: Approximately $85/month in higher interest (0.375% premium) over the 2-year hold = $2,040. That $2,040 protected the investor from $25,000+ in personal liability.

Common Misconceptions About Non-Recourse DSCR Loans

"Non-recourse means the lender can't sue me at all"

Wrong. Non-recourse limits the lender to the property collateral for standard default. But carve-out violations can — and do — result in personal lawsuits. Non-recourse limits your exposure; it doesn't eliminate it.

"I don't need an LLC if I have a non-recourse loan"

Debatable. Non-recourse protects you from loan deficiency, but an LLC protects you from other liability — tenant lawsuits, slip-and-fall claims, environmental liability beyond the carve-out scope. They serve different purposes and work best together.

"All DSCR loans are non-recourse"

False. Many DSCR lenders only offer recourse loans. Others offer both and price them differently. Don't assume — ask specifically and read the loan documents.

"I can just walk away from a non-recourse loan with no consequences"

Mostly true but incomplete. You can surrender the property and avoid personal deficiency liability (assuming no carve-out triggers). But a foreclosure or deed-in-lieu still appears on your credit report, may affect your ability to obtain future DSCR loans, and you lose your equity in the property.

"Non-recourse loans don't require a personal guarantee"

Misleading. Non-recourse DSCR loans typically still require a carve-out guaranty — a personal guarantee limited to the carve-out triggers. You're not signing a full personal guarantee for the loan amount, but you are signing a guarantee for carve-out events.

The Bottom Line

The recourse vs. non-recourse decision isn't about finding the cheapest loan — it's about building a portfolio structure that protects your wealth while allowing you to scale. For investors with a single property and limited other assets, recourse is often fine. For investors building a multi-property portfolio with significant personal wealth, non-recourse is a strategic necessity despite the premium.

Whatever you choose, read the carve-out provisions. The guarantee you sign on a non-recourse loan defines the boundary between protected and exposed. Understand where that boundary is, conduct yourself to stay on the right side of it, and non-recourse becomes one of the most powerful risk management tools in your investing arsenal.

The best DSCR borrowers I work with don't just shop for rates — they shop for loan structures that align with their overall wealth protection strategy. Rate matters for cash flow. Recourse structure matters for survival. Choose accordingly.