Non-recourse mortgage loans

In a recent post, we went over the reasons why buying a house can be a great financial move. Especially if you live in a non-recourse state, the risk in buying a house is greatly diminished.

What is non-recourse debt?

This is debt where you are not personally liable if you default. The creditor can take the collateral, but that's about it. He can't go after you for the rest. 1

Let's look at a mortgage example. Once someone goes into foreclosure, there is a deficiency balance. This balance is the amount due to lender after foreclosure sale.

Let's look at a worse case example:

Downpayment $60,000.00
Mortgage debt $240,000.00

If you foreclose and in the worst case scenario, the property has no value. The deficiency balance will be 240k$ (or the mortgage balance). This means, the bank can't go after you for this amount, even if you have it laying around in bank account.




Which states have non-recourse mortgage loans? 2

  • Alaska (Alaska Statutes Chapter 09.45)
  • Arizona (Arizona State Code Title 33-814.G and 33-729.A)
  • California (Code Civ. Proc. § 580b)
  • Iowa (Iowa Ch. 654.6)
  • Minnesota (Minnesota Statute 582)
  • Montana (Montana Code Annotated Title 71, Ch. 1)
  • North Carolina (North Carolina General Statutes Ch. 45 Article 2B, §§ 21.36 and 21.38)
  • North Dakota (North Dakota Century Code Ch. 32-19-01)
  • Oregon (Chapter 88)
  • Washington (Revised Code of Washington Title 61, Ch. 61-12)
  • Wisconsin (Wisconsin Statutes and Annotations Ch. 846).

Do I qualify for it ?

First, you need to live in a nonrecourse state.
Second, if you are buying a primary house, you most likely qualify for it.

There used to be a restrictions for only the initial mortgage (are the time of purchase). It could be 1st, 2nd or 3rd mortgage.

But this restrictions was lifted in 2012 even if you refinance your home. As long as the money is used to pay for mortgage.

California, one of the best non-recourse state:

For California, the law is especially friendly to borrower. It works for

  • Any dwelling of less than 4 units (if you live in any part of it).

It does NOT work for

  • commercial property
  • investment property
  • dwelling with more than 4 units.

Why is this so advantageous:

The reason this law is so advantageous is because the risk is asymmetric and for once in your favor. When you buy a house, if you lose the whole value then you can walk away and only lose your down-payment. But the house price increase has no limit. Granted, it's probably a lot of money, but it is less than having to pay the whole rest of the house.

It's like buying a call option that NEVER expire where the premium is the down payment.

If you financed a car, crashed it and didn't have insurance, you would be on hook to pay it back. But with the house, it is not the case as long as you live in a non-recourse state.

I never heard of such a law in any other country. If you foreclose in Canada or Europe, they would come back after you for every penny.

What do you think? Are non-recourse loans provide you an advantage? Would you feel more comfortable taking mortgage debt knowing it is non-recourse?