A non-recourse loan is one in which the loan collateral cannot be seized by the lender in the event of default. Even if the market value of the collateral is less than the outstanding debt, unlike a recourse loan, the lender cannot seize the borrower’s other assets.
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Non-recourse loans still result in some personal accountability for the lender because they can confiscate the underlying loan collateral, even though the lender’s power to get a deficiency judgment is restricted.
However, non-recourse loan providers have a higher risk of not recovering the principal and interest payments. Because of this, non-recourse loans are not typically provided by financial institutions; although, certain banks, online lenders, and private lenders do.
Example of a Non-Recourse Loan
Take into account a buyer who secures a mortgage for $250,000 to buy a house valued at $300,000. The bank has the right to foreclose on the collateralized property in an effort to recover the unpaid debt if the homeowner defaults on the $230,000 portion of the loan. However, in some places, the lender cannot recover the extra $15,000 by income garnishment or other means if the local real estate market is oversupplied and the house can only be sold for $215,000.
- If you can meet stricter approval conditions, non-recourse loans can be an alternative for you. Borrowers with a high credit score and a low debt-to-income ratio might, in exceptional circumstances, be eligible for a non-recourse loan.
- Accept paying a higher interest rate. Similar to how a higher interest rate shields lenders from riskier non-recourse loans.
- Are getting a mortgage on a house in a non-recourse state. You will automatically receive a non-recourse mortgage if you reside in one of the 12 non-recourse states. Unless you are behind on your loan payments, it often doesn’t matter whether your loan is recourse or non-recourse. But to find out if your current mortgage is recourse or non-recourse, first check to see if you live in one of the states that fall under that category.
- If you have other types of debt, such as credit cards or auto loans, you may find out what kind of loan you have by looking over your original loan documentation or by getting in touch with your lender. Talk to your lender about measures to prevent default, such as forbearance or loan modification, if you can confirm that you have a recourse loan and suspect that you may default.
So, to assess the effects of default, foreclosure, and potential income garnishment, you need also consult your lawyer or accountant.