Holy smokes! I get questions for appraisers, for inspectors, for real estate attorneys, for everyone involved in a real estate transaction except the ding-dong Realtor. Here comes a question for mortgage lenders, who are entreated to chime in with better answers:
Generally speaking, are homeowners personally liable for their mortgage? 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% or 20%, the personal promise may not be as significant, but if the down payment is very low or if real estate is declining in value (as it is right now in many markets), the lender will depend on the borrower to bring any short-fall to the closing table, should the home sell for less money than is owed on it.
But: There are many types of loans that are not secured by the borrower’s personal promise to repay. The loan will be secured by the real property borrowed against or by other assets, but a foreclosure won’t affect the borrower’s personal credit rating.
Here is an example that can be used for residential loans: 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 loan is that they can be used by self-directed retirement accounts, to permit them 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 (and leverage) real estate to build your retirement nest egg tax free…
Technorati Tags: real estate marketing
Franz says:
Great question and answer. I’ll add that even on recourse loans, when homeowners are facing foreclosure, the bank will often be open to taking a short-sale in which they agree to release the borrower from the promise to pay for less than the payoff amount.
November 4, 2006 — 6:12 pm
Larry Cragun says:
As I read this question I see it as a non investment property question. Our company has been a correspondent bank for both prime and subprime lenders. We have had mortgage broker contracts with numerous, over 50 Fannie and Freddie mortgage banks. I have never seen or been offered a loan product by an institution that alleviates personal liability.
We have had loan applications from properties held by a family trust. This may be an effort to sidestep personal liability. In these cases the borrowers were still put through a process that obligated the in fact owner occupants.
Seller financed properties could end up in having the effect of accomplishing the question asked of you. I think this should be handled by an attorney.
Larry Cragun
November 4, 2006 — 6:56 pm
Condo Blog says:
How about closing in an LLC which I believe in most states totally protects the memebers of the LLC. I dont know the specifics on closing in an LLC as far as a liablity…however I know it can be done and it is becoming more and more popular as banks allow the transaction. Anyone have more infomormation on closing in an LLC?
November 5, 2006 — 10:41 am
Mary Goldman says:
I am a loan officer in Georgia. One of my loans went bad (foreclosure). Now the bank wants my broker to “buy back” the loan and he is trying to hold me financially responsible or to buy the house before it goes to the court house steps. Is he crazy? or does he have legal grounds? Thanks, Maria
November 22, 2006 — 4:02 pm
Greg Swann says:
> Is he crazy? or does he have legal grounds?
You must take this up with your attorney. Nothing I can say — except that I feel your pain — can make any difference.
November 22, 2006 — 5:14 pm