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What is a Non-Recourse Loan?

The Non-Recourse loan, a common feature of the Reverse Mortgage package, is often a misunderstood subject. Yet this is a straightforward feature that indicates that the borrower can't borrow more than their home's overall value when the reverse mortgage loan matures.

But to help you understand this term better, here's a clear definition of the non-recourse loan.

What Exactly Is A Non-Recourse Loan?

A non-recourse loan serves to limit the number or amount of a borrower's assets that the lender can claim for loan recovery in case the borrower defaults. If a borrower defaults on a non-recourse loan, the lender can only go after the assets listed as loan collateral.

This means, the lender cannot claim other assets like a personal bank account if it was not listed for the loan. So how does such a loan work, or how does it benefit a consumer?

Here is an example of how a typical non-recourse loan works:

Let's say a senior citizen in their 60s has a home worth $500,000, and they qualify for a non-recourse loan worth $349,000 in the fixed-rate reverse mortgage package.

Over time, the borrower's money will add up and accumulate. After accruing interest for over 20 years, the elderly borrower will be enjoying their cash that could be over one million dollars.

Now the borrower's home that was once worth $500,000 could’ve appreciated over time, or it could have depreciated and not worth the current real estate market value. According to the reverse mortgage loan, the maximum amount that should be paid from the reverse mortgage package after 20 years if the borrower is deceased would be the same value as the home in 20 years.

So if the home appreciates to over a million dollars, the surviving family members can sell it, pay the reverse mortgage and inherit the remaining proceeds. Alternatively, they can take another loan to pay off the reverse mortgage and retain the home.

However, the worst-case scenario would be if the property depreciated and was worth $500,000 after 20 years when the borrower died. In this case, the property heirs have two options. First, they can sell the property and repay the loan, or second, leave it altogether and let the bank take it.

Whichever way they choose to go, the property value will remain at $500,000, and the lender or lienholder cannot claim the estate because the balance accrued and the property's current market value are not the same. So the decision to sell or not to sell is left entirely on the property heirs.

Home Patio and Pool

Non-Recourse Loans vs. Recourse Loans

As we have explained above, non-recourse loans mean the lender can only claim properties listed in the loan should the borrower default. Such loans typically involve property.

So if it’s a commercial property like an apartment complex that generates monthly income, the lender can retain the property and continue collecting monthly rent or sell it off. Otherwise, that's the only property of the borrower the lender is permitted to claim in case of loan default.

On the other hand, a Recourse Loan makes the borrower liable for the entire loan. So in case they default, the lender is permitted to go after other properties belonging to the borrower even if they are not covered as collateral by the loan.

Here, the lender has the right to seize the borrower's personal accounts and portions of their income until the loan is paid off.

Who Qualifies For A Reverse Mortgage?

If you are an elderly homeowner living on a fixed income with little savings or need to top up your savings for the home, a reverse mortgage loan can be a good idea. Assuming your retirement benefits are insufficient to cover your monthly budget, a reverse loan can supplement your Social security earnings and cover your medical expenses, etc.

Who Does Not Qualify For A Reverse Mortgage?

On the flip side, a reverse mortgage is not for you if you're struggling with bills and considering selling your home to supplement your income. In such circumstances, the logical thing to do is sell up and downgrade.

Furthermore, a reverse mortgage is not a good idea if you plan to leave the property to your heirs. Whereas they'll retain the home, they'll be inheriting a mortgage debt that keeps on piling instead of decreasing.

The Good And The Bad Of Non-Recourse Loans On Reverse Mortgages

The good thing about reverse mortgages is that they are a steady source of income that's long-term. You can use your home's equity for good money without moving. This money is not taxed, nor is it classified as income. That means as a loan, the IRS can't go after it, and it will not affect your Social Security or Medicare funding.

The only downside of such loans is that in case of a default, it can cost you your home. And that failure to make those monthly payments can result in unfavorable credit scores.

The difference between a Reverse Mortgage and a traditional loan is that the latter dwindles with time while the former builds up every month.

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