Recourse
Whether a lender can pursue the borrower personally beyond the collateral — and, in note sales, whether the buyer can require the seller to buy a note back.
Recourse describes whether a creditor can pursue a party personally for a debt, beyond just seizing the collateral. The term has two distinct meanings in the note world that are easy to confuse: (1) borrower recourse — whether the note holder can chase the borrower for a deficiency after foreclosure; and (2) seller recourse — whether a note buyer can require the seller to buy a note back if something is wrong. Both affect how a note is valued and sold.
Borrower recourse vs. non-recourse
When a borrower defaults and the property is foreclosed, the sale may not cover the full balance. Whether the holder can pursue the borrower for the shortfall depends on state law and the loan:
- Recourse loan: The holder can seek a deficiency judgment against the borrower personally for the unpaid balance (subject to state limits and fair-value offsets).
- Non-recourse loan: The holder's recovery is limited to the collateral; they cannot pursue the borrower for a deficiency. Several states make residential foreclosures effectively non-recourse, and some bar deficiencies on purchase-money or seller-financed loans entirely.
This matters because in non-recourse situations the property is the only source of recovery, putting even more weight on lien position, the equity cushion (ITV), and how fast the state allows foreclosure. A note in a borrower-friendly, anti-deficiency state is valued purely on the collateral path.
Seller recourse in a note sale
The other meaning shows up in the note sale agreement:
- A sale with recourse gives the buyer the right to require the seller to repurchase the note (a buyback) if a representation proves false — for example, an undisclosed default, a missing document, or a misstated balance. The recourse is usually tied to breaches of the seller's representations, not to ordinary borrower default after the sale.
- A non-recourse (true) sale transfers the note with no buyback obligation, so the buyer bears the performance risk — typically reflected in a more conservative price.
Most private note sales sit in between: the seller does not guarantee the borrower will keep paying, but does stand behind the accuracy of what they represented. If the seller lied or a document was defective, recourse provisions let the buyer unwind or adjust.
Why it matters when you sell
Understand both kinds of recourse:
- Know whether your note is recourse or non-recourse to the borrower in its state — it shapes how a buyer underwrites recovery and prices the note.
- Read the recourse/buyback terms in your sale agreement — what could trigger a repurchase, and for how long. This is the strongest reason to disclose everything accurately during due diligence: clean, truthful disclosure means recourse provisions never get triggered.
This is general information, not legal advice; deficiency and recourse rules vary significantly by state.