Nonrecouse loans are simply loans that are secured by collateral, such as a home. There are many advantages to having a nonrecourse loan, and those who unknowingly take out recourse loans instead of nonrecourse loans can alter the security of their assets for a very long time.
Security
The financial website Investopedia.com states that the main characteristic of nonrecourse loans is the fact that they are secured, backed by a tangible type of collateral. Most home loans are nonrecourse loans because they are secured by a home. This means that if the homeowner defaults on the loan, the lender can foreclose and take the home back.
Personal Liability
The main benefit of nonrecourse loans, according to the real estate website Active Rain, is that there is no personal liability with a nonrecourse loan. What that means is even if you cannot make your mortgage payments for a nonrecourse loan, the lender will be able to take your house back, but they will not be able to go after you personally or take any of your other assets to repay the money you owe.
Tax Liability
The Journal of Accountancy states that when a borrower defaults on a nonrecourse loan and the lender takes the property back, the borrower doesn't get off completely free as far as taxation. The lender sells the house in order to regain some of their lost money. If the sale price is under the amount that the borrower owed, they will have to claim COD, or cancellation of debt on their income taxes. This results in an extra tax burden for the borrower.
Examples of Nonrecourse Loans
According to Investopedia.com, nonrecourse loans are usually first mortgages or home loans. They do not include refinancing or home equity lines of credit, as those are recourse loans. Active Rain states that nonrecourse loans also only involve the purchase of one- to four-unit properties, so if a person took out a mortgage to buy an apartment complex with 16 units, it would be recourse debt rather than nonrecourse diet.
Risk for the Lender
The risk that the lender faces in making a loan is higher in recourse loans than it is for nonrecourse loans. This is because recourse loans always have some type of collateral that the lender can take if the borrower stops making payments. The collateral, such as a home, may not be worth as much money as is owed, yet it is still easier for the lender to take back a home rather than to try to take other assets that a person owns.
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