If you’ve taken out a mortgage and are paying it back on time and in full, you probably will never pay attention to whether your home loan is a “non-recourse” or a “recourse” loan.
However, these terms become crucial if you’re having difficulty making payments and face the possibility of a short sale or foreclosure.
If you have a recourse loan, the lender can go after your collateral for the loan—namely your home—and your personal assets.
For example: If your loan balance is $200,000, and your home sold for $150,000 in a foreclosure, the lender could demand payment of the remaining $50,000 and possibly garnish your wages to get that money.
State laws drive recourse loan rules
You and your lender have options to work out an agreement if you’re unable to pay your mortgage.
State laws regulate how lenders handle debts that are not paid in full. There are currently 12 states that are “non-recourse” states, where lenders are barred from placing a judgment or lien on assets other than your home to repay your mortgage:
• Alaska
• Arizona
• California
• Connecticut
• Idaho
• Minnesota
• North Carolina
• North Dakota
• Oregon
• Texas
• Utah
• Washington
Even if you live in a recourse loan state, lenders don’t always attempt to pursue full repayment of your loan. An attorney can help you evaluate the consequences of defaulting on your loan.
Options in a recourse loan state
If you’re having trouble making your mortgage payments or if you must sell your underwater home, your first step should be to contact your lender.
You also can talk to a HUD-approved housing counselor who can work with you to identify your options. If you want to sell your home, find a REALTOR® experienced with short sales who can negotiate with your lender on your behalf.
For example, if you can sell your home for $200,000 but you owe $240,000 on your mortgage, the lender may be willing to accept the lower sale price and forgive the additional debt in order to avoid the expense of a foreclosure.
If you want to stay in your home, you may be able to negotiate a loan modification with your lender, particularly since the government’s Making Home Affordable program is encouraging lenders to work with struggling borrowers.
Seek professional advice
If you do end up in a foreclosure, discuss with your lender, a lawyer and a housing counselor what to do if you face a deficiency judgment. A deficiency judgment is legal action to reclaim money after foreclosure proceedings have been completed.
Lenders don’t always request deficiency judgments against borrowers, particularly if they are difficult to obtain in your state.
If you do have a deficiency judgment filed against you, you may have to consider declaring bankruptcy to avoid having your wages garnished. Consult experienced professionals who can help you work through the necessary steps in your locale.
Updated from an earlier version by Herbert J. Cohen.
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