Recourse Loan

• Borrowing 80 percent of the market value of a home and placing a down payment of 20 percent on the property is a good way to create equity from the start. However, if house prices drop by 20 percent, then your 80 percent (80/20) loan becomes a 100 percent loan. If values continue to decline, you could owe more on the house than what it is worth. If you find yourself in financial trouble, you may not be able to make your mortgage payment and your house can be foreclosed upon by the mortgage lender. Once the house is repossessed and sold, if the entire amount owed is not recouped, your lender can attempt to collect the difference from you. This is a recourse loan.
  
  

Non-Recourse Loan

• With a non-recourse loan, you are not liable for the difference between what the lender collects from the sale of your property and the amount that you owe on it. You cannot be sued for the shortfall on the home. This also is referred to as an anti-deficiency statute. Depending on your state, only the mortgage used to purchase the home initially is considered non-recourse.
  
  Whether you have a recourse or non-recourse loan, the government required you to report forgiven debt of more than $600 as income on your federal tax return. However, the Mortgage Forgiveness Debt Relief Act relieves you from this tax liability from 2007 through 2012. This does not prevent a lender from collecting on a recourse loan.
  
  

Non-Recourse States

• Determining whether or not a loan is non-recourse depends on the state where the property is located. There are non-recourse states that automatically exempt you from being liable for the deficiency in a foreclosure or short sale. Some states, such as California, will exempt the purchase mortgage only. Others, such as New York, are one-action states that allow the lender to choose between foreclosing or suing the borrower for the money. Non-recourse states are Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington. One-action states are California, Idaho, Montana, Nevada, New York and Utah.
  
  

Refinance and Equity Loans

• If you refinance a purchase loan in some states, your subsequent mortgage will not have non-recourse features, even is you maintain a 20 percent equity. However, other states do allow you to refinance and keep the protection of a non-recourse loan. Most equity loans are recourse in nature. However, if you want an 80/20 loan, but do not have the money to put 20 percent down, then a second loan is processed directly after the close of the sale. This mortgage may be considered a non-recourse loan. Check the mortgage note and your state law to make sure.