I had an interesting exchange with a client that surprised me. We were discussing refinancing a loan in California. I ran the numbers and realized he could save $377 a month. We talked about how to proceed, but then he hesitated. He mentioned something about having to pay some sort of penalty when he refinanced, that he would not have to pay if he did not refinance. I finally realized he was talking about recourse versus non-recourse loans.
What is recourse?
Recourse means the lender can sue you (has recourse against you) if your house sold at auction or through a short sale for less than the amount owed to the lender. If you borrowed $400,000 to buy your home and it sold at auction for $300,000 there is a shortage of $100,000. The lender can have recourse against you for that amount, depending on your state.
In some states, such as California, non-recourse laws apply only to “purchase money” loans. These are original home loans that are used to purchase property. So this means if you refinance a loan in California, the subsequent refinance loan can become a recourse loan.
What would you do?
So the client I first mentioned actually thought about not refinancing and forgoing savings of $377 a month. This way he could retain the ability to walk away from his mortgage and not be chased for any shortage. I was fascinated that someone would even think that way!
Rules vary by state
In many states equity lines are recourse loans. Hence, a loan you took out to purchase your house could be non-recourse, but the equity line of credit you got won’t be. And you may be liable for taxes on the deficiency regardless of whether the loan is recourse or non-recourse. Each state has its own rules for its recourse and deficiency statutes. You need to look up your state’s current statutes and contact a local attorney to confirm current rules. Don’t fully trust something you read off of the internet.
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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
