Recourse and Non-Recourse Debt
The Difference Between Recourse and Non-Recourse Debt
Under California law, a debt is considered “nonrecourse” when a loan is made under either one of the following two circumstances.
When the loan is made to purchase a one-to-four unit property and the borrower intends to occupy at least one of the units, or when the seller carries back financing for all or a portion of the purchase price of any real property.
In the event of default by the borrower, the lender, or financing seller, is restricted to recovering the property with no right to proceed against the borrower for any deficiency should the property be worth less than the loan amount.
Under California law, a “recourse” debt is one in which neither of the two exemptions above occurs. Examples of recourse debt are:
Refinances of existing mortgages
Home improvement loans
Equity lines of credit
Loans other than seller financing securing a debt for purchase of property that
is not an owner-occupied one-to-four unit property.
The lender is not limited to taking the property back and the borrower may be personally liable on the debt. If the lender chooses to foreclose using a trustee’s sale, then the lender waives the right to go after the borrower for the deficiency despite the fact that the loan was a recourse debt. In order to go after a deficiency judgment, the lender must go through a judicial foreclosure process.