Do You Know The Difference Between A Recourse Loan Or A Non-Recourse Loan?

You may have had your home recently foreclosed on and part of the Santa Maria real estate market on a mortgage home loan that you were upside down on, and maybe you may be plain tired and frustrated and about to become another statistic, but what you need to know is your loan recourse or non recourse, and what does that mean?  Just keep in mind the following is intended for general information only please seek legal counsel for your own specific situation.  Most of this information will be how California treats mortgage loans if outside California you may want to see how your state treats mortgage home loans.

This blog will be focused on what the difference is between a recourse and a non-recourse loan because there is a huge difference and most are not aware of the difference.   With all the Santa Maria homes for sale that are either in foreclosure or homes going through the short sale process it is something homeowners should be familiar with. So lets go with an everyday story you bought your house 2003 you paid $280,000.00 you put no money down when you bought your home with one of those popular 80/20 loans.   A couple of years goes buy and now your home is unbelievably worth $500,000.00.  Just like everyone else you get all kinds of good stuff in the mail full of useful advice to consolidate all of you bills and even make some more home improvements and get a new car using the equity of your home and only make one payment and get so much done.  Why wouldn’t you do it, so you take out a loan against the house and now you owe $450,000.00.  Now let’s fast forward to today.

Well the economy is not so good and your home is not worth $500,000.00 in fact its not even worth what you bought it for now.  More like $250,000.00 and you can’t make the payments anymore because the payments are based on what the home is worth.  So you are forced to either do a short sale or just walk away like so many others since you can no longer make the payments on your home.   But before you do just walk away and your home is another foreclosure, here is something to think about.

Loans that are recourse are basically loans, that allows the lender to use legal means to collect the deficiency balance from the borrower after the asset has been taken back and sold.   Kind of like your home now where you have a loan for more than the what the house is worth.  That being said the bank can come after you legally for the difference, which is kind of tough for most people since they don’t carry 100k on them.  Loans that are non-recourse are loans that the bank cannot come after the borrower for the deficiency amount.   For reference you can refer to California Code.  Please keep in mind that this pertains to your home not to your rental properties and investment homes.

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In California when you buy a home it is considered “purchase money” whether it be one loan or two loans.  A loan that is considered a purchase money loan is a non-recourse loan.  The problem with most homeowners is that they refinanced their homes and turned their non-recourse loans into recourse loans.    Although if the lender did a non-judicial foreclosure he cannot come after you in the state of California because that is the trade off that they have for doing a non-judicial foreclosure vs. a judicial foreclosure which means going to Court.  So you get the benefit of the “one action rule”.  Unless you had a second that got completely wiped they can come after you for the deficiency and there are still more exceptions to the rule as you read along.

Now here is where it can get tricky if you have two loans but from different lenders and you don’t have enough to pay off the second,,,,, well the second can come after you but if both loans are from the same lender lets say both are with Wells Fargo and not purchase money so for example if you took out a second later you are okay AS LONG AS BOTH LOANS ARE NOT FROM DIFFERENT LENDERS.   The lender will come after you for the difference and can sell your account to collection agencies as well.   That means they can sue you and levy your bank account or even garnish your wages.

IF YOU HAVE AN FHA OR A VA THESE RULES DO NOT APPLY THESE ARE FEDERALLY SPONSORED LOANS AND SUPERSEDE CALIFORNIA STATE LAWS AND ,,,,,,YOU ARE CORRECT ARE RECOURSE LOANS….home being financed after the collapse are FHA financed and yes they can come after you.  I am not sure if you got that all down and I do hope that this made sense to anyone reading this.  If you are unsure if you will be sued seek some legal advice.

BUT THERE IS HOPE If YOU DO A SHORT SALE BEFORE THE YEAR END. For one California has a new law that any lender that agrees to a do a short sale whether it be a second or investment property.  That they will not come after you for any funds owed.  This is a huge weight off the shoulders of many homeowners that may be thinking of having to do a bankruptcy only to protect themselves.  Due to there being a deficiency amount on the money owed to the bank.  Last but not least the home forgiveness act which expires this year DEC 31, 2012.  IRS CONSIDERS ANY DEBT FORGIVEN TO BE TAXABLE INCOME.   So do the math with me you owed $500k you short sale for $250k the IRS WILL TAX YOU $250K UNLESS YOU ARE INSOLVENT OR FILE BK or the home was your primary residence.  But that all changes on Jan 1, 2013 there will be a tax bill unless there are changes in the Govt.  but it seems that even the Govt. is looking for ways to generate money and would not expect a bailout.  If you do not qualify for a loan modification seriously consider a short sale soon.

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