What does the non-recourse clause in a reverse mortgage mean?
As a reverse mortgage borrower, it’s important to understand the difference between a non-recourse loan and a recourse loan. In the simplest terms, the difference has to do with which assets a lender can pursue if a borrower fails to repay a loan—typically the house that was used as collateral. But keep in mind, both loan types allow the lender to take control of and sell any assets used as collateral should a borrower default or leave the house permanently. The difference lies in whether or not money is still owed to the lender after the collateral is seized and sold. Here is some additional information about the two types of loans:
A non-recourse reverse mortgage loan is beneficial to borrowers when money is still owed after the house is seized by the lender and sold because the lender is unable to go after other assets. If the sale price of the house doesn’t cover the full amount owed, the lender cannot collect any further compensation from the borrower or his or her heirs. The lender must absorb the loss. Of course non-recourse loans are attractive to borrowers, but keep in mind, they usually have higher interest rates, and the borrower usually has to have excellent credit in order to qualify.
With an FHA insured reverse mortgage, also known as a Home Equity Conversion Mortgage or HECM, your heirs have three options for repayment once you leave the home permanently:
- They can keep the home by paying off the loan. And they won’t have to pay more than the home is worth.
- They can sell the home to repay the loan, and they will not be required to pay more than the sale price of the home.
- They can take out a traditional mortgage to repay the reverse mortgage loan.
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A recourse loan means that in the event the borrower defaults, the mortgage lender can foreclose on the property, sell it for less than the value of the loan amount, and then go after the borrower for the difference, even suing to have the borrower’s wages garnished.
All HECMs are non-recourse loans, meaning when the property is sold, and if the sale of the home doesn’t cover the balance of the loan, the FHA covers the difference. However, not all reverse mortgage loans are FHA-insured. Some are proprietary loans and have different loan agreements.
So which reverse mortgage loan is better—a non-recourse loan or a recourse loan? That answer depends on which side of the desk you’re sitting. As you might imagine, a resource loan offers more protection for the lender while borrowers usually prefer non-recourse loans because it protects their other assets and heirs.
If you are considering a reverse mortgage loan, make sure you understand all of your options, and work with a qualified, reverse mortgage professional to find out which loan program is right for you.