Understanding Non Recourse Loans

There are two main types of loans: recourse and non recourse loans. The type of loan available to homeowners may depend on the state in which they live. It could also depend on whether it is a primary mortgage, second mortgage, refinance or home equity loan.

Defining Non-Recourse Loan

A non-recourse loan is one in which the collateral used to secure the loan comprises the borrower's entire risk. This means that if a borrower defaults, the lender can not garnish wages or take other legal action beyond foreclosure. The worst case scenario for the borrower is the loss of their home and damage to their credit. In a recourse loan, though, the lender has the ability to go after the buyer even if a short sale or foreclosure has already taken place.

Securing a Non-Recourse Loan

Lenders risk more when offering a non-recourse loan, so they are generally harder to obtain. Compromises must typically be made in order to get this type of loan. Paying a higher interest rate is one such compromise. Other options include offering a higher down payment or taking on the higher payments of a shorter term loan. Recourse loans are cheaper and easier to obtain, though obviously riskier for the borrower. Obtaining a non-recourse loan will depend on location, lender, credit history and personal preference, in addition to the factors already mentioned.