Nonrecourse Debt

Nonrecourse debt is a loan secured by collateral where the lender's only remedy on default is the collateral itself; the borrower is not personally liable for any shortfall. Many commercial mortgages are nonrecourse, which is why commercial lenders lean on the property's coverage ratio rather than the borrower.

When a lender cannot pursue the borrower, the property's income is the only thing standing behind the loan, and DSCR becomes the central underwriting test. Commercial nonrecourse loans usually carry bad-boy carve-outs that restore personal liability for fraud or misconduct.

Most residential DSCR loans are recourse. The lender ignores the borrower's income for qualifying but still requires a personal guarantee, from the individual or from the members of an LLC. The ratio test is inherited from nonrecourse commercial lending; the personal guarantee is what lets a residential lender accept a 1.0 minimum where a nonrecourse lender would want 1.25.

Further reading: Nonrecourse Debt on Wikipedia.