Recourse Loans and Non-Recourse Loans

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do mortgage companyies usually seek a deficiency judgment on home foreclosures
Depends upon whether it is a recourse loan or not. A recourse loan is one where the lender can come after you for any excess amount of money you owe. Whether a loan is recourse or non-recourse varies with the state you are in, whether it was a purchase money loan or a refinance, and always, what it says in the Note.

For a non-recourse loan, that's it. If something happens and the property does not fetch enough money at sale to pay the lender off, that lender is out of luck whether they want to be or not. These are often used in reverse 1031 exchanges, where the accommodator is going to hold title to the property for a while but is usually unwilling to shoulder the risk that the lender may be able to come after them for a deficiency. Due to the fact that the lender cannot come after the borrower for the difference, these are riskier loans and therefore carry a higher rate-cost trade-off than recourse loans. This is nothing more than any rational person would expect.

The law is different everywhere, but I don't think have never seen a cash out refinance that was not a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of tools to get that money back.

Now just because a loan is non-recourse does not mean that the lender will necessarily approve a short payoff. In fact, it is usually harder to get those approved because the lender knows that this is the only chance they have to get their money, whereas with a recourse loan they can attach other assets to pay for their loan.

Finally, it is to be noted that just because a lender does have recourse and can attach other assets does not mean that they will. If you're down to $0.47 to your name, they'd have to be pretty silly to waste a lawyer's time doing so. However, just because you don't have it now doesn't mean that you will never have it. Statute of limitations also varies, but if you receive a financial windfall within the first few years, don't be surprised if the lender who you thought forgave the difference is standing right there, demanding their metaphorical pound of flesh.

Caveat Emptor

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10 Comments

Joey Marino said:

I heard that there are states that don't allow recourse. Is this true? If so, is there a list of states that are recourse or non-recourse? I'm in Ohio.

Dan Melson Author Profile Page said:

I am not aware of any states that are non-recourse in all cases, because the flip side of that is that they are going to cause mortgages to be more expensive in that state, as well as narrowing the conditions that mortgages are available under. It could be that there are some but I don't know of any.

The most likely non-recourse scenario is the way it is in California: Purchase money loans are non-recourse, providing there has been no fraud. But if you refinance, even if you don't take a single dollar out, that loan is full recourse.

Jgirl562 said:

I have two loans on a condo in CA and the 2nd is a home equity line of credit. I have not refinanced the line of credit, but did unlock my interest rate through a Lock Cancellation Amendment. I called the bank and they said this was not considered a refinance and was just an amendment to the existing loan since no new contract was issued - does that mean that the loan would still be considered original purchase money and therefore still non-recourse? I just want to be sure that altering it did not change the type of loan it was. It was and has always been money for the original purchase - I have never accessed it for anything else.

Dan Melson Author Profile Page said:

My understanding is that it should still be non-recourse. However, please check with an attorney to make certain that it is non-recourse in your case before you do anything that depends upon it.

MW said:

I have been told that full recourse loans are not legal in California unless they are owner occupied? Can you verify this or tell me where I can find this information?

Dan Melson Author Profile Page said:

That supposition is, if anything, the reverse of what I believe to be true. My understanding is that there are comparatively few times when loans on investment property are not full recourse.

I am not a lawyer and I'm not going to pretend I fully understand a law that apparently changes with the moods of whatever court you happen to get hauled into, but that is my understanding of it.

KPaul said:

Would a refi to buy out an ex due to divorce be a recouse loan in California? All cash was used to purchase the home and pay off existing loans.

Dan Melson Author Profile Page said:

My understanding is that yes, it would be a full recourse loan.

Double check with an attorney, of course.

KE Author Profile Page said:

We have a first mortgage through B of A in California. It was a new construction loan where we first had a loan on a lot, then the construction loan which rolled over into one single loan once the construction was done.

No other property was attached. No second mortgages have been taken out. We went in with approx. three hundred thousand dollars of cash money down.

There are hundreds of pages of loan documents surrounding this - where in the world do we even begin to look for that one line that might say recourse - or non-recourse? What page should it be on - or in what section?

Keeping in mind again that it's California, it is going to be non-recourse by it's very nature - or is there some part where they may have slipped "recourse" into the mounds of paperwork they piled on us? Where is it? Do they even SAY non-recourse if it is non-recourse?

Dan Melson Author Profile Page said:

Talk to a lawyer, but I do not believe that yours is an acquisition loan and is hence subject to recourse.

The Note, which is what sets the terms of the loan, is where you look for this. It doesn't have to be spelled out, in which case state law is what applies. The Note does not have to been in sections, but it most often is, and recourse will usually be addressed either in the repayment terms or default sections - once again if it is explicitly addressed at all.

Once again, talk to a lawyer. I'm just an agent and while I have had to educate myself in order to have the right general idea, a lawyer should have specific information pertaining to your situation and law and precedent as it exists.

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This page contains a single entry by Dan Melson published on March 11, 2008 7:00 AM.

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