Thinking about a short sale? Find out if your loan is a recourse or non-recourse loan!

When you short sale your home, there are some key terms that you need to be aware of including whether or not you have recourse loan. It is important to understand the process of a short sale and the difference between a recourse loan and non recourse loan before you decide if this program is right for you. 


 The short sale allows you to pay off most of what you owe and potentially salvage your credit. This short sale solution is a benefit to those who have no equity in their home, have an adjustable loan where the monthly payments are increasing or simply can't afford their mortgage payments.

In order to qualify for a short sale, a home owner must owe more than the home is actually worth. In order to determine this, a broker's price opinion or appraisal is needed. Most banks will have a broker complete the BPO if you approach them for a short sale or you can request to have it done yourself. While banks don't particularly enjoy doing a short sale, it is better for them financially than a foreclosure and most banks will be willing to work with you.

At this time, the recourse or non recourse loan issue will arise. The vast majority of short sales are done under a non recourse loan policy. This means that the home owner and the bank agree to a figure that is less than the actual debt but suitable for both parties giving the banks no recourse once the home is sold. It is entered on a credit report as a debt that is settled for less than is owed.

Non Recourse Loans

California for example is a non-recourse state. This essentially means that as long as the homeowner has purchased their property with a purchase money loan or used a home equity line of credit for home upgrades or in the purchase itself, the banks do not have recourse after the short sale is complete. In other states the banks do have the ability to come after the homeowner for the balance owed.


  • December 14 2011 - Temecula
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Answers (6)

Gilbert you literally have NO IDEA what you are talking about.
In Arizona purchase money loans are non-recourse after FORECLOSURE. There is no law whatsoever that state the same for a short sale. Last I heard, California has similar laws.

In fact, I expect realtors to get sued in the future for giving precisely the advice you just gave. Many home owners could have let there homes go into foreclosure with no fear of a deficiency judgement ever, but have proceeded to short sale the home without adequate legal advice, and now face possible collections on the remainder of their debt. Arizona has similar laws to California, and I would NEVER let a client go through with a  short sale, without the bank clearly giving up any right to collect on the deficiency in writing.

This thread is great evidence why you should contact a local attorney specializing in real estate if you are contemplating either of these possibilities: so many of the so called 'short sale expert agents' have no idea what they are talking about.
  • December 14 2011
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Hello Robert,


I am right. You are wrong. Sorry
  • December 14 2011
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Helllo Everyone,

Roberto lives in Arizona, and as everyone knows ( except for Roberto) real estate laws vary from state to state. Looks like Roberto and his wife umm I mean dog seem to be the only ones left in the dark on this issue.

  • December 14 2011
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Anti-Deficiency / Non-Recourse States

Alaska

Arizona

California

Connecticut

Florida

Idaho

Minnesota

North Carolina

North Dakota

Texas

Utah

Washington
All of these states are non-difficiency / non recourse states. That factor has nothing to do with short sales at all. However, it appears that California passed a new law in July of this year, that protects Californians in a short sale. Notice that this has nothing to do with general non recourse mortgages.

  • December 14 2011
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Profile picture for sunnyview
What many agents do not tell owners is that they benefit from doing short sales. Underwater owners may have other options that are better, but they need to get all the information they can before they decide what is best for them.

Owners thinking about short sale please get tax and legal advice BEFORE taking ANY advice about short sale from an agent.
  • December 14 2011
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Profile picture for shasta_steve
Gilbert I will give you credit for saying how a short sale is recorded on a credit report.   Almost every other agent on here claims it says "paid in full".  I also like that you say "may" when you talk about credit score.  The truth is the only way a short sale is much better for you credit score is if you don't go late on your payments. 

Now that being said you do not understand how the law works in California as far as recourse and non-recourse.   For a residential loan to be non-recourse in California it has to be all purchase money, and never refinanced.   If it was refinanced or was an equity loan it is recourse and it does not matter what you did with the money.   That only matters for tax purposes.

Now just because the loan is recourse does not mean the bank will be able to come after you for the money.    If a bank does a non-judicial foreclosure, and almost all are that, it is unable to pursue for more money but it will still be recourse for tax purposes.   But if you have two loans, and the second one is recourse, if the first one forecloses the second will be able to come after you. 

Now what I think you are trying to say is if a bank allows a short sale they are barred from coming after you for more money.  The problem is that if you have a recourse second they don't have much incentive to allow the short sale.   

 
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