The different aspects of the mortgage world are seemingly endless. I often wish a setup existed like Neo had in The Matrix where I can plug in real quick and learn all of life’s intricacies in a few hours. Bad news is we can’t do that and we have to read; good news is we’re not in a post-apocalyptic, artificial-intelligence-controlled, cyborg wasteland where humans are mere livestock. Call me an optimist, and even if we don’t have robot technology to make us learn faster, I’m still optimistic about the progress we’ve been making in our weekly Know Your Mortgage meetings. It’s time for us to take it a bit further this week, as we discuss the differences and implications of recourse and non-recourse loans.
What are the Differences Between Recourse and Non-Recourse Loans?
You’re getting much better at asking these questions. The difference between recourse and non-recourse has to do with which assets of yours a lender can take if you (the borrower) can’t repay a loan. Regardless of which type of loan you have, if you fail to pay off your loan, anything that was used as collateral on the loan can be taken by the lender. In the case of mortgages, this collateral would be the home you needed the loan for in the first place. The lender will seize the house, sell it, and pay off what you defaulted. The difference of what happens (if anything) after that separates recourse and non-recourse.
What’s a Non-Recourse Loan then?
To start, non-recourse loans favor the borrower, because it assures the borrower only loses their collateral. This means if you fail to pay your mortgage, and the lender forecloses on your house, that’s all they can do. So, if they sell the house and don’t make their money back from the defaulted payment, it’s their loss; no legal action can be taken against you for those lost funds.
How Does a Recourse Loan Work?
A recourse loan favors the lender, because it allows them to pursue legal action even after the collateral (again, likely your home) has been seized. Remember how the lender can lose money after selling your foreclosed house with a non-recourse loan? Well, if it’s a recourse loan they can garnish your wages, or pursue legal action to levy your bank account to make up for the amount lost after selling your home.
How Do I Find Out if I Have a Recourse Loan?
Having a recourse loan depends on state law. The number of states that practice non-recourse outnumber the recourse-practicing states greatly. However, this number also depends on how a lender chooses to foreclose your property. It can be done in or outside of court (known as judicial or non-judicial foreclosure), and the variables that happen from there get even more, well, varied. The best thing you can do is research online for your state and see where the state laws fall on whether your loan is recourse or non, and how that can change with impending foreclosure. The most understandable reference I’ve found was through this page, but, if you’re facing foreclosure, make sure that you contact a professional in the matter.
Well, consider that your daily upload of mortgage knowledge for the day. Consider me the Morpheus to your Neo. Wait, it was the big guy who flew the ship that uploaded all that knowledge into Neo. For the sake of the metaphor, I’m Morpheus still so it’s less confusing. Regardless of how that movie went down, please ask away if you have any lingering questions about recourse or non-recourse loans.