Nov. 17, 2006: The home buyer is always liable for the mortgage
I got a great question by e-mail. It's really a lender question, but it introduces a number of interesting topics.
"Are homeowners personally liable for their mortgages? If yes, is it possible to structure a home loan that doesn't require a personal guarantee?"
Generally speaking, yes, a mortgage is secured both by the real property and by the borrower's personal promise to repay the note.
If the down payment is 10 to 20 percent, the personal promise may not be as significant. But if the down payment is very low or if real estate is declining in value, the lender will depend on the borrower to bring any shortfall to the closing table, should the home sell for less money than is owed on it.
Many types of loans are not secured by the borrower's personal promise to repay. The loan will be secured by the real property or by other assets. A foreclosure won't affect the borrower's personal credit.
Here is an example that can be used for mortgages for residential rental homes: the non-recourse loan. The loan is secured by the real property only, with no "recourse" to the borrower on default.
Obviously, the lender is going to make sure the amount lent is substantially less than the value of the property, that the property produces income sufficient to pay its own expenses, etc.
This is an investment product, but the interesting thing about non-recourse loans is that they can be deployed by self-directed retirement accounts to own real estate.
Your self-directed IRA, as an example, would have to make a hefty down payment on a piece of real property, and there are rules about what your IRA can own and to whose benefit. But by means of the non-recourse loan, your IRA can own real estate to build your retirement nest egg.
But the answer to the main question is probably no, alas. I know of no primary-purchase mortgage loan that does not require the borrower to personally guarantee repayment.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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