Knowing whether or not a loan is recourse or nonrecourse debt is critical when borrowers are facing foreclosure. Depending on the type of debt there could be tax consequences for a foreclosure or a short sale.
The main difference in a recourse loan and a nonrecourse loan is the liability. With a nonrecourse loan the lenders only way of recovering their loan is the security, in this case the property. With a recourse loan the lender is able to go after the borrowers assets if they do not receive enough from the secured asset to pay the loan off in full.
Whether or not a loan is a nonrecourse or recourse depends on the type of loan.
Notes secured by real estate are nonrecourse when the note is:
· The original purchase money loan on an owner occupied one-to-four unit residential property;
· A seller carry back note secured by the real estate sold; or
· A note containing an exculpatory clause, relieving the borrower of liability.
Examples of recourse loans are refinances of existing mortgages, home improvement loans, equity lines of credit, and loans, other than seller financing, securing a debt for purchase of property that is not an owner-occupied one-to-four unit property.
With recourse debt the lender is not limited to taking the property back and the borrower may be personally liable on the debt.
Here is a handout from the California Association of REALTOR’s that explains more about recourse and nonrecourse debt.
https://www.parsonsrealty.com/parsons_realty/taxes/car_faq.pdf
