The terms "non-recourse" and "recourse" refer to the way that a lender can pursue legal action in the event that the borrower defaults on the loan. With a recourse loan, the lender is allowed to pursue legal action in order to obtain payment for the loan. Specifically, the lender may be allowed to obtain a lien on property in addition to any collateral that the borrower put up for the loan. This is done through a proceeding called a "deficiency judgment".
In contrast, with a non-recourse loan, the lender can still pursue legal action. However, they usually can’t access any other property or funds besides the ones used to secure the loan as collateral. This provides the borrower with some protection against abusive collection efforts by lenders. Lenders may often experience financial losses under non-recourse laws.
The terms non-recourse and recourse loans typically apply to mortgages and other home loans, although they can apply to various other types of loans as well.
No. Non-recourse mortgage loans are only allowed in certain states. States that allow non-recourse (known as "non-recourse states") include: AK, AZ, CA, CT, FL, ID, MN, NC, ND, TX, UT, and WA.
The specific details for non-recourse loans will vary with each state. For instance, some states may actually allow the borrower limited access to non-collateral properties for the loan. This will depend on each state’s individual laws on non-recourse loans, as well as the actual terms in the loan contract itself.
Non-recourse loans basically work due to anti-deficiency laws that are enforced in non-recourse states. Anti-deficiency laws prevent lenders from filing a deficiency lawsuit in the event of a default. At best, the lender will be able to obtain a lien only on the property used to secure the loan (which is usually the home that the mortgage was taken out for). Or, in some cases, anti-deficiency laws may limit the scope of the lender’s ability to collect on default payments.
Non-recourse loans can sometimes be complicated to understand. Also, related issues such as deficiency judgments and other legal concepts can be difficult to handle. You may need to hire a real estate lawyer if you have any questions or legal concerns regarding non-recourse loans. Your attorney can provide you with the legal guidance, assistance, and representation necessary to help you succeed on your claim.