Key Differences Between Recourse and Non-Recourse Home Loans
Picture this. You’re browsing real estate listings one day and come across the home of your dreams. It has everything you desire—state-of-the-art kitchen appliances, a lawn with automatic sprinklers, and stunning interior décor you can’t wait to show off on social media. You’ve got a bit of money saved for a down payment, so you speak to a mortgage broker about taking out a home loan. But when they ask you whether you prefer applying for a recourse or non-recourse home loan, you’re stumped. If only you knew what they were and how they’re different!
Lucky for you, we’ve summarized what recourse and non-recourse mortgage loans are as well as the key differences between them in this post. So, without further ado, let’s dive into the world of recourse and non-recourse home loans!
What Are Recourse Home Loans?
Have you heard the term “collateral”? It refers to assets you own that act as security for a loan you wish to take out. If you default on your mortgage payments, the mortgage lender has the right to seize the collateral you agreed to put up in the mortgage agreement or promissory note. But how does this relate to recourse home loans? The answer’s simple—recourse home loans allow the mortgage lender to seize your personal assets, even if they aren’t listed as collateral in the mortgage agreement!
For instance, suppose you listed your car as collateral for a recourse home loan. If you’re unable to repay the loan, the mortgage broker has the right to repossess your car and liquidate it as compensation. If the amount generated by selling your car isn’t enough to pay off the debt, the mortgage lender also has the right to seize other personal assets you have like your cash savings!
What Are Non-recourse Home Loans?
If you take out a non-recourse home loan, the mortgage lender is prohibited from seizing any of your assets apart from those listed as collateral in the event of a default.
In the above-mentioned example, if you had taken out a non-recourse home loan, you’d give up your car and other property if you defaulted on the loan. However, any other assets you have like cash savings would remain untouched.
Key Differences
1. Borrowers Aren’t Personally Liable for Non-recourse Home Loans
One of the main differences between recourse and non-recourse home loans is the extent of personal liability to the borrower. If you’re personally liable for a loan, your personal assets like cash savings can be seized by the lender if you default. Therefore, if you miss a payment on a recourse home loan, the mortgage lender has the right to take out the amount owed from your personal bank account with additional interest. In contrast, non-recourse home loans prevent borrowers from being personally liable for missed payments!
2. Recourse Home Loans Are Typically Offered at a Lower Interest Rate Than Non-Recourse Home Loans
One of the main factors that determines the amount of interest charged on a home loan is how much risk the mortgage lender takes on. If the probability of the borrower defaulting is high, the mortgage broker charges a higher interest to compensate. However, with recourse home loans, the mortgage broker has the right to seize assets beyond those listed as collateral in the loan agreement. Therefore, they don’t need to compensate for risk by charging a higher interest rate—which is why the interest on recourse home loans is lower than non-recourse home loans!
3. Recourse Home Loans are Easier to Obtain for Borrowers with Low Credit Scores
Have you ever checked your credit score? It’s a three-digit number that summarizes your financial background and ability to repay debts. Unfortunately, borrowers with low credit scores find it tougher to obtain a mortgage than those with high credit scores. Fortunately, that’s not the case if you’re taking out a recourse home loan!
Recourse home loans are easy to obtain for borrowers with bad credit scores because the lender is adequately compensated. In comparison, it’s vital to have a strong credit history if you want to take out a non-recourse mortgage because it’s designed to favor the borrower in the event of a default.
4. Defaulting on Non-recourse Home Loans Has a Smaller Impact on the Borrower’s Credit Score Than Recourse Home Loans
Did you know defaulting on a non-recourse home loan has a smaller impact on your credit score than defaulting on a recourse home loan? If you default on a non-recourse home loan, none of your assets will be seized except those listed as collateral in the loan agreement. Since collateral isn’t one of the factors companies use to calculate credit scores, your credit score won’t be substantially impacted. In comparison, your credit score is likely to dip significantly if you default on a non-recourse home loan!
Atlantic Home Capital Helps Clients Apply for Recourse & Non-recourse Home Loans in New York
If you’re eager to consult a top licensed mortgage lender in New York about applying for recourse and non-recourse home loans, come see our team at Atlantic Home Capital!
We’re consistently praised for the quality of our services and issue all sorts of mortgage loans such as VA loans for military personnel, FHA loans for first-time homebuyers, and investment property loans for real estate investors. We also offer comprehensive refinancing services, including cash-out, cash-in, and rate-and-term refinancing.
So, are you ready to talk to a team of professional mortgage consultants with a proven track record about recourse and non-recourse home loans? If so, leave us a message on our website or drop us an email at [email protected] to arrange an appointment!
