Definition of a Nonrecourse Mortgage
- Twenty states have laws defining most mortgages as nonrecourse. In some states, there are limits to what falls under the nonrecourse provision. Consult a mortgage professional to determine the status of the state the mortgaged property is in. The status is a decision of the state legislature and can change. Although nonrecourse may be the state law in your state, you should consult with an attorney regarding your specific situation.
- If a property has a $100,000 mortgage due at the time of default and foreclosure, and the property only sells for $50,000, the lender is obligated to take a loss of $50,000 on the transaction.
- If a property has a $100,000 mortgage due at the time of default and foreclosure, and the property only sells for $50,000, the lender can seek damages from the borrower in the amount of $50,000. In effect, the lender can sue the borrower for the difference between the amount owed and the revenue received during the foreclosure sale. If a judgment is levied against the borrower, it may be collected through a garnishment on wages or a lien on other properties or even future property holdings.
- Because recovery of the investment is more challenging in the event of a foreclosure of a nonrecourse loan, lenders often have higher standards for issuing them. According to the website mortgageadvisors.org, a nonrecourse mortgage is usually limited to 80 to 90 percent of the property value.
- According to the website realestateinvestingtax.com, a piece of property sold at foreclosure is treated as if the borrower had sold the property for the amount due on the mortgage at the time of foreclosure. If the amount due on the mortgage is greater than the purchase price of the home, the difference might be considered a gain and subject to tax. This could occur if a second mortgage was taken based on higher equity in the house or the home was refinanced when home prices were higher. Consult a tax professional to determine any tax liability.