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What is a Nonrecourse Loan?

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  • Written By: wiseGEEK Writer
  • Edited By: O. Wallace
  • Last Modified Date: 05 July 2018
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A nonrecourse loan is a type of loan structured around the lender’s ability to seek repayment should something like default occur. In these loans, the lender is only able to seek recourse or repayment through agreed upon assets. Typically, this means the lender can only recoup losses through the actual property upon which the money is loaned, instead of being able to hold the borrower responsible for extra amounts. Such a loan can protect the other assets of a borrower who is suddenly rendered unable to repay a loan.

In most cases, the nonrecourse loan is a property mortgage, and whether this loan is available to people tends to depend on regional law. In the US, for example, there are certain states where routinely borrowers are protected against having to pay more if they walk away from a mortgage that is a higher amount than the value of the property. The only recourse of the lender, in these cases, is to sell the property. If there are losses at this point, the lender can’t sue for borrower for additional funds.

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It should be noted that not all states have this provision, and those people living in a recourse state need to be careful when they make loan agreements. It’s quite possible that people could lose assets like retirement savings or other properties if they have a recourse loan. In some regions, where there isn’t this protection for the borrower, there might be ways to obtain a nonrecourse loan and people could ask their mortgage broker or a financial advisor if this is possible.

The advantages to the nonrecourse loan are numerous. Generally, only the property is at stake if a person cannot maintain the loan. There may be provisions which can make it harder to qualify for loans of this type. These could include having money set aside in savings or needing to make a higher percentage downpayment. Lenders need to protect their assets by making sure they can reasonably recoup losses if borrowers default, so they want a certain amount of surety that the price they can get for property compensates appropriately and doesn’t create losses.

Clear examples exist of what occurs in a nonrecourse loan state when property values sharply decline and many borrowers default on mortgages. It can lead to huge troubles in banking industries because banks lose large amounts of money if they take a loss on every foreclosure. Millions of dollars can and have been lost in this way, as they were in the housing market slump of the first decade of the 2000s. To further reduce risk, lenders in nonrecourse loan states have greatly increased standards on borrower type, especially redefining ideal lender qualifications and credit score.

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