Why might a lender consider a nonrecourse loan?

A lender might consider a nonrecourse loan primarily because it limits borrower liability to the property only. This means that if the borrower defaults on the loan, the lender can only seek recovery from the property itself and cannot pursue the borrower's personal assets. This characteristic is significant for lenders since it mitigates their risk associated with borrower default, as they know their potential losses are confined to the asset being financed.

Nonrecourse loans are typically seen in commercial real estate transactions, where the value of the property itself is frequently used as the basis for lending. This type of loan can be attractive to borrowers as well, allowing them to protect their personal assets while still securing financing for the property. Therefore, while lenders may be careful in their assessment of such loans, the limitation of liability can lead them to consider these arrangements in specific circumstances, especially where the collateral is deemed sufficient to cover potential losses.