When builders need to secure financing for their home construction projects (including spec construction projects), the traditional lenders have all of the power.
The lender not only has the money – they can also potentially impact the builder’s personal finances if they default on the loan.
Fortunately, there is a lesser-known loan option that gives the borrower a lot more power.
It’s called a non-recourse loan.
In the following article, we’ll define both recourse and non-recourse loans, explain their differences, highlight the benefits of the non-recourse option, and demonstrate how Snap.Build helps builders secure these loans.
What Is A Recourse Loan?
Whether you’re an experienced spec home builder or new to the industry, you’re likely familiar with recourse loans.
With this arrangement, a builder secures the funding for their project in the traditional manner by offering the lender a form of collateral.
Although this more traditional loan seems fine on the surface, it can be detrimental to the builder if the project doesn’t go as planned.
In the event that the builder defaults on the loan and their collateral does not sufficiently cover the amount of the loan, the lender can pursue additional assets.
In other words, if the builder uses their residence as collateral and its value doesn’t equal the amount of the loan, the lender can take additional assets from the builder (such as personal vehicles, vacation properties, etc) to make up the remaining balance.
Financial institutions typically extend recourse loans to builders to protect themselves from risk. This is especially true during times when the economy is unpredictable and/or inflation is high.
If the construction project falls through, the recourse loan ensures the lending party is able to recover its money – even if it means the borrower suffers additional losses.
Essentially, recourse loans are low risk for the lender – but high risk for the borrower.
What Is A Non-Recourse Loan?
On the surface, non-recourse loans operate much like traditional recourse loans: the borrower offers collateral to the lender in exchange for a loan.
However, there is one major difference: if the borrower defaults on the loan and their collateral does not cover the full extent of the loan, the lender cannot pursue any additional assets.
So, if there’s a balance due after the borrower’s collateral is surrendered, the lender incurs a loss.
As you can see, that arrangement is a major incentive for spec home builders who need to secure funding for their projects.
Even though that is a tremendous benefit, that’s not the only benefit non-recourse loans offer builders.
What Are The Additional Benefits Of Non-Recourse Loans?
In addition to reducing a builder’s liability in the event that they default on their loan, the non-recourse loan option offers other advantages.
Recourse loans are tricky when it comes to partnerships. Since a personal guarantee is required to secure the loan, it’s often difficult for the partners to decide who assumes that responsibility.
Is only one partner putting their assets on the line?
Are they both assuming the liability? If so, does one partner have more to lose than the other if they default on the recourse loan?
Non-recourse loans help level the role of responsibility for partnerships. Since the lender cannot pursue additional assets if they default, partners do not have to worry about incurring further losses outside of the initial collateral.
Non-recourse loans also give builders greater peace of mind during unpredictable times.
During economic downturns, banks and other financial institutions are very skittish when it comes to loaning money. That’s why they use recourse loans as a safety net to prevent any losses if the borrower’s collateral doesn’t cover the entire loan amount.
With a non-recourse loan, builders can confidently continue or pursue new construction projects without the worry of losing their personal assets.
Secure Your Home Financing With Snap.Build
Clearly, non-recourse loans give builders lots of advantages that are not available to them with traditional recourse financing.
Still, securing a non-recourse loan on your own can be tricky.
Most traditional financial institutions do not offer these types of loans. Additionally, going through the loan process is time consuming. This process often leads to delays in the construction project itself. Worse, the land that the builder wanted to purchase may be sold by the time the loan is approved.
Snap.Build removes these barriers for builders.
Our team secures the non-recourse loan on behalf of the builder. Rather than taking months for approval, Snap.Build typically secures the necessary funding within three weeks so qualified builders can move fast without delay.
In addition to securing loans, Snap.Build also provides first-rate loan and construction management services.
Builders can rely on Snap.Build to pay all of the various subcontractors, vendors and suppliers. This helps builders avoid the risks of outstanding invoices and helps reduce project delays.
Best of all, builders typically save 3%-5% on each project by relying on Snap.Build to secure and manage the non-recourse loans and make payments on their behalf.
Ready to enjoy the power of non-recourse loans and Snap.Build?
Contact our team today to lay the foundation for a successful project!