What is Recourse loan & Non Recourse Loan?
It is a type of loan where banks can not go after assets of the borrowers is called non recourse loan.
On the contrary when lenders can go after the borrowers to recover their losses is called recourse loan.
Here’s an example. Let’s say you moved to a mining town out west and purchased a house for $1755,000 with 5% down payment, but still owe $150,000 on your Mortgage. Forward a bit, the town is now dead and a realtor says you can get $75,000 for the property at most.
Now you’re out of luck if you want to walk away, because the loan is backed by the CMHC; since the loan is now “under water”, the bank is left short and the CMHC must cover this by likely suing for any losses – if you have assets, they’ll go after that.
Let’s jump over to the U.S (and some provinces in Canada) where Non recourse loans are more prominent.
What is Recourse loan & Non Recourse Loan?
I’ve been getting a lot of questions about these mortgage rates, regarding rates from both banks and private lenders; so let’s start off by taking a look at Nominal Rates:
A non recourse loan is a loan where the borrower are not liable for repaying the outstanding balances on the existing loan. The banks and/or corporations cannot come after your personal assets or income.
You may find these typically on longer term permanent commercial real estate loans, generally on a more stable and performing asset. Keep in mind, there are always some exemptions to this rule, so be sure to ask me any questions beforehand!
Potential borrows might find it attractive to go for non recourse loans – but just remember, they may come with higher interest rates and are geared toward individuals/businesses with the best credit. Additionally, failing to pay off a non-recourse debt?
The borrower’s credit score will be affected in the same way as failing to repay recourse debt.
Andy Farber"The mortgage holder can go after any of your assets, although some provinces protect funds in your RRSP account. But the banks usually want to keep you in your home and paying off that mortgage." (Garry Marr, 2015)
In conclusion, Mortgage Planning is VERY important. Knowing all your mortgage loan options along with loan types (Recourse & non recourse) right from beginning will save you time, and give you peace of mind.
Home buyer mistakes run costly and it is always the home buyer who pays for those mistakes.
For most of us, buying a home is the single biggest financial transaction we will make. It’s exciting and fulfilling, but it can also be overwhelming, even downright frightening.
The pitfalls are many but fortunately, most are avoidable and we can tell you how to avoid them. Real estate agents, bankers, lawyers, accountants, and other experts in the real-estate game each have their own lists of the worst mistakes a buyer can make. Click to know all 11 home buyers mistakes to avoid.
Just remember, do not rush to sign your loan documents, as not all lender loans are set up the same way. Do it right, the Mortgage Delivery Guy Way!