What is a nonrecourse loan?
A nonrecourse loan, also known as nonrecourse debt or nonrecourse plan, is one that is secured by collateral. Nonrecourse loans are frequently a type of mortgage loan secured by the real estate itself. However, the borrower is not liable for any loss incurred by the lender if the collateral loses value.
In a nonrecourse loan, some type of collateral secures the debt. That means that if the borrower of the funds stops making her required payments, the lender can seize the property to compensate.
Occasionally, the value of the asset doesn’t cover the cost of the debt. With a nonrecourse loan, the borrower won’t be liable for that difference. For that reason, nonrecourse debt is much less common than recourse debt, in which the lender can seize more than just the collateral.
From the lender’s standpoint, nonrecourse debt is a higher risk than recourse debt. This typically can make these loans more expensive and harder to obtain by borrowers than typical loans.
Borrowers looking for the most affordable loans can use Bankrate.com’s mortgage rate comparison tool to get updated information.
Nonrecourse plan example
Jim obtains a nonrecourse loan to purchase a home. The loan’s value is $100,000. A few years later, Jim defaults on the loan. The lender seizes the property through the foreclosure process. However, the home is only worth $75,000 due to falling home values. The lender is not able to sue Jim for the remaining value in this situation. In a recourse loan, the lender could have filed a lawsuit against Jim for the remaining $25,000.