Q&A on Refinancing All-Cash Home Purchase
Ira Waldman was quoted in a June 13, 2013 blog post by the San Francisco Chronicle offering advice for homebuyers and information about the differences between recourse and non-recourse loans. According to the article, if a homeowner defaults on a recourse loan, the lender can go to court and seek an order to garnishee the homeowners wages to make up the difference between the value of the home and the balance of the loan. The same is not true for non-recourse loans, which just allow the lender to foreclose on a home in the event of a default.
The article also looked at the two types of loans in a scenario where a homebuyer purchases a house with all cash, then later gets a mortgage to free up the money. Those loans are considered recourse debt because they don't fit the traditional notion of a purchase money mortgage. However, Waldman said, should the homeowner default on the loan and the lender foreclose outside of court, it would be considered non-recourse because “the effect of the non-judicial foreclosure is to render the loan non-recourse and preclude personal liability” for any deficiency.
Should a buyer borrow money from a family member and then take a loan out to repay them, the loan would keep its non-recourse status because it is considered to be refinancing a purchase money mortgage. As a safeguard, Waldman recommends buyers sign and record a deed of trust in favor of the family member they borrowed from.