Laila Keith
When it comes to mortgages, there are two main types of loans: recourse and non-recourse. The difference between the two lies in the rights of the lender in the event of the borrower defaulting on their loan. With a recourse loan, the lender can seize the collateral (the property purchased with the loan) and pursue legal action to recoup any remaining debt. On the other hand, a non-recourse loan permits the lender to only seize the collateral, even if its value does not cover the entire debt. This means that with a non-recourse mortgage, you will never owe more than the value of your home.
How do you know if you have a non-recourse mortgage?
| Characteristics | Values |
|---|---|
| Location | Non-recourse loans are available in 12 US states: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington. |
| Lender | Non-recourse loans are riskier for lenders and are therefore less common. They are usually reserved for borrowers with excellent credit histories. |
| Interest rates | Non-recourse loans have higher interest rates. |
| Defaulting on payments | If you default on payments, the lender can only seize the collateral (your property) and cannot pursue any further legal action. |
| Loan agreement | The loan agreement will specify that the lender can seize and sell your property if you default. |
| Other assets | The lender cannot seize any other assets beyond the collateral. |
| Debt amount | You will never owe more than the value of your collateral. |
What You'll Learn
Non-recourse loans are favourable to borrowers
Non-recourse loans are also beneficial for borrowers who are planning for the future, as they come with estate planning benefits. In the case of a recourse loan, if the borrower passes away, their heirs will have to qualify for the loan, which can lead to a stressful situation if they do not meet the necessary requirements. With a non-recourse loan, the heirs' financial qualifications are typically not questioned as long as the loan payments are made on time.
Additionally, non-recourse loans do not require borrowers to have excellent credit or a steady income to qualify. While they may come with higher interest rates, larger down payments, or other conditions, they are still a good option for borrowers who may not meet the stringent requirements of a traditional loan.
It is important to note that non-recourse loans are not available in all states, and the availability of these loans depends on the laws of the state where the loan originates. As such, it is crucial to review the terms of your mortgage agreement and consult with a lender or real estate attorney to determine if a non-recourse loan is an option for you.
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Recourse loans are favourable to lenders
Recourse loans are more favourable to lenders than non-recourse loans. This is because they reduce the risk of loss for the lender in the event of a borrower defaulting on their loan.
A recourse loan allows a lender to pursue additional assets when a borrower defaults on a loan if the debt's balance surpasses the collateral's value. In other words, if a borrower fails to live up to their obligation and defaults on the payment schedule, the lender will first seize and sell the collateral specified in the loan. If that is not of sufficient value to repay the loan amount, the lender can go after the borrower's other assets or sue to have the borrower's wages garnished.
Recourse loans are less risky for lenders and, as a result, they are usually offered at lower interest rates. This makes them more attractive to borrowers. In contrast, non-recourse loans are riskier for lenders, so they are offered at higher interest rates.
Most mortgage loans are recourse loans, except in 12 US states that allow both recourse and non-recourse home loans. These are Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.
To know if your loan is a recourse or non-recourse loan, you should look over your mortgage note, as all the terms of your mortgage are included in that document.
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Non-recourse loans are available in specific states
Whether a loan is a non-recourse loan depends on the laws of the state where the loan originates. There are 12 US states that, by law, only allow non-recourse loans. These are known as "non-recourse states" and include Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.
In these states, non-recourse mortgage loans allow lenders to foreclose on the home but not seize other assets to make up for any losses. For example, if you default on your mortgage, the lender can repossess your house but will not pursue further legal action if the resale value of the home is less than the loan amount you still owe.
Non-recourse loans are riskier for lenders and, therefore, usually come with higher interest rates. They are also harder to obtain, with banks only offering them to specific customers based on financial circumstances or customer needs.
If you are unsure of your loan type, you can research your state to determine its laws regarding these loans and how impending foreclosures or asset seizures may affect you. You can also check your mortgage note or talk to your mortgage lender.
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Non-recourse loans have higher interest rates
Non-recourse loans are typically offered to borrowers with great credit and good financial standing. A borrower with near-perfect credit may be able to negotiate with their lender to include a non-recourse clause at no additional cost. However, non-recourse loans are generally reserved for individuals and businesses with stellar credit histories. As such, lenders impose higher credit standards on borrowers to minimize the chance of default.
The difference between recourse and non-recourse loans is only relevant if the borrower defaults on payments. Recourse loans are less risky for lenders, so they are usually offered at lower interest rates. Recourse loans are also favoured by lenders, while non-recourse loans are favoured by borrowers.
Non-recourse loans are not available in all locations. Whether a loan is a non-recourse loan depends on the laws of the state where the loan originates. There are 12 US states that, by law, only allow non-recourse loans: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.
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Non-recourse loans require good credit history
Non-recourse loans are a type of collateral loan, or a secured loan, where the property or asset secures the debt and can be seized if the borrower defaults on payments. In the event of a default, the lender can only seize the collateral and cannot pursue the borrower for any remaining debt. This means that the borrower will never owe more than the value of their collateral.
Non-recourse loans are generally reserved for borrowers with good credit histories, stable finances, and high credit scores. This is because non-recourse loans pose a greater risk to the lender, and they will want to minimise the chance of default. Due to this increased risk, non-recourse loans tend to have higher interest rates than recourse loans.
In the US, whether a loan is a non-recourse loan depends on the laws of the state where the loan originates. There are 12 states that only allow non-recourse loans: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington.
To find out whether your loan is a non-recourse loan, you can review your mortgage agreement, ask your lender, or consult a real estate attorney.
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Frequently asked questions
A non-recourse mortgage is a type of collateral loan, or a secured loan, where your property secures the debt and can be seized if you default on your payments. The lender can only seize the collateral specified in the loan agreement, even if its value does not cover the entire debt.
To know if you have a non-recourse mortgage, you can look over your mortgage note, as all the terms of your mortgage are included in that document. You can also check if you live in a non-recourse state, as some states have non-recourse mortgage laws.
There are 12 states that, by law, only allow non-recourse loans. These are Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah and Washington.
With a recourse loan, the lender can seize assets other than the collateral if your debt exceeds the value of the collateral. A non-recourse loan offers extra protection for the borrower in exchange for a higher interest rate.
A non-recourse loan is best if you have an excellent credit score. It is also a good option if you are looking for extra protection in case you are unable to repay your loan.
