Non-recourse.

If you are spending any time talking about real estate and loans, then you have probably heard the word recourse and non-recourse.  Here in the Salem Oregon area, most home loans are non-recourse loans. What this means is that if the bank forecloses on your home, the home itself is the sole means they have for collecting on the loan. The home is the collateral and that’s it.

A recourse loan means that if your home goes into foreclosure and it doesn’t sell for what the bank is owed, then they can come after you for a “deficiency judgement” that is what is still owed them.  Now here in the Salem Oregon area, short sales are starting to be more common. I see short sale listings on a daily basis these days.  With the words short sale the “in” buzz word in the media these days, it makes sense that homeowners struggling will want to try a short sale and partially salvage their credit.

20706326What sellers thinking about a short sale need to know, is that banks are being sneaky…well, I think they are just counting on sellers to not read the fine print.  What is the fine print saying?

Recourse.

Yep…some banks, when they approve a short sale for a seller, are inserting language into the real estate contract, turning that non-recourse loan into a recourse loan.  They are agreeing to the short sale to clear the title, but are creating a contractual obligation for the seller to repay the loan, regardless.

Many sellers are taken unaware because they didn’t read the fine print and then the collection agencies start calling.  I know there are some of you out there are really struggling, but please make sure that you read everything the bank sends you before agreeing to the short sale.

In some cases, foreclosure makes more sense than trying a short sale.  Sounds crazy, but it’s true.

Short sales are not for everyone.

4 Comments

  1. Melina this is very important and interesting information. I had not seen this happen and because you have so graciously educated your sellers I now know to make sure my sellers are educated on short sale recourse and non-recourse loans. Nicely done I love your graphic

    • Thesa it is so hard to keep up with all of these changes in the industry. For what it is worth, I am hearing that Bank of America pretty much has this standard in their response to sellers who request a short sale. I am also hearing that they are removing it…people just need to read the fine print.

  2. We have a loan with Bank of America on an investment property (bare land)in Bend OR. We live in California.
    We are going to try a short sale. If the bank puts a recourse clause in the new contract for that short sale
    where can we go from there? Do we have any other options or would we be better off letting it go to forclosure?

    • Chris,
      What is the right choice for you depends on your situation. Bank of America pretty much always comes back with the right to come after the deficiency. You don’t have to accept their terms for the short sale. Oregon contracts are written so that the seller has to approve the terms laid out by the lender. You don’t have to agree, or you can continue to negotiate to get that removed. You local real estate agent or an attorney can help you navigate what is the right choice for you.

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