What is Non-Recourse Debt?
Within the context of learning about reverse mortgages, the average consumer may come across the term “non-recourse loan” quite a few times. After all, reverse equity mortgages are indeed a type of “non-recourse debt.” So what, exactly, is non-recourse debt and how does non-recourse debt compare to other types of debt? This article explains what a non-recourse loan is and how non-recourse debt affects the reverse mortgage consumer.
A non-recourse loan is a secured loan, meaning the borrower has pledged some form of collateral in order to obtain the loan in the first place. Many loan types have collateral. For instance, home equity loans use the collateral of the house itself to secure the loan, though the collateral of a secured loan can be any type of property with an acceptable value. In the event that the borrower defaults on the loan, he or she agrees to give up that collateral in order to pay off the debt they’ve incurred.
In the case of the reverse equity mortgage, the collateral for the mortgage is the home in which the borrowers own. Non-recourse debt is different from other types of debt because of the reduced risk to the borrower. In a traditional home equity loan, the borrower is responsible for the total amount borrowed. If the house they are using as collateral has dropped significantly in value, the borrower is responsible for making up the difference. Therefore, if the mortgage amount was for $100,000 and the collateral property was worth $80,000, the borrower is responsible for paying the remaining balance of $20,000.
Non-recourse debt is different because the borrower is never responsible for paying more than the value of the collateral. In the case of the reverse home mortgage, a borrower would not be responsible for paying more than the value of the home. If a borrower drew the same $100,000, yet the collateral was worth $80,000, the borrower would only be responsible for paying the $80,000. The remaining $20,000 is absorbed by the lender s a loss.
For this reason, reverse mortgage lenders of non-recourse products will usually only lend a percentage of the value of the collateral to protect their own assets. All reverse mortgage products are non-recourse debt. HECM reverse mortgages, as well as “jumbo” reverse mortgages offered by private lenders, are both non-recourse debt for the borrower. For this reason, most borrowers will be subjected to limitations on the amount they are able to draw from a reverse home mortgage.