The lender's protection for a mortgage loan primarily comes from the value of the home that secures the loan. If you default on the loan, the bank can take the home, sell it, and recover the remaining loan balance. The question of recourse comes up if the repossessed home sells for less than the amount that is owed on the loan. For a homeowner in this situation, a nonrecourse loan is better than a recourse mortgage.
Lender's Right to Collect
A nonrecourse mortgage is secured only by the home financed by the loan. If the bank loses money after taking the home and selling the property, that loss must be absorbed by the lender. With a recourse mortgage, the homeowner remains on the hook for any money the lender does not recover by selling a repossessed home. The lender on a recourse mortgage can send a bill to the homeowner for any loan balance amount that was not covered by selling the home, and can sue for the additional money to make the lender whole on the loan.
State Laws Vary
Whether a mortgage is of the recourse or nonrecourse type depends on state law. Mortgage lenders prefer to write recourse loans, so you will usually find nonrecourse mortgages only in those states that require home loans to be on the homeowner's side and be nonrecourse. A dozen states require mortgage lenders to offer only nonrecourse home loans. In the other 38 states, a mortgage will most likely be a recourse loan, giving the lender the right to go after the homeowner for more money after a home is foreclosed on and sold.
Processing A Foreclosure
Iin a nonrecourse state, the foreclosure process -- to the point where a home is resold after being taken by the bank -- happens much quicker. Since the lender cannot go after the homeowner, there are no other legal hurdles to stop the bank from reselling the home to recover as much as possible of the mortgage balance. In a recourse state the lender must take the homeowner to court to obtain a judgement concerning any money the lender does not get from selling the home. In many cases the home cannot be sold until the case has gone through the court system.
Besides the recourse or nonrecourse issue, letting a home go to foreclosure will have serious negative effects on your credit score and ability to borrow money in the future. There are other ways to get out from under an upside-down mortgage that are less damaging to your personal financial situation. With a deed in lieu of foreclosure, you sign the home over to the mortgage company rather than waiting until the lender takes the home. With a short sale, you sell the home with the lender accepting a lower amount as full payment on the loan.
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