A non-recourse loan is a loan where the bank can only seize the collateral used in the loan (your home) and you have no personal liability beyond that. With a recourse loan, you continue to have liability even after the home is seized after default or sold as a short sale.
Your loan will be labeled according to the terms in the note along with the laws of your state as Recourse vs. Non-Recourse. Primary loans used as purchase money only in some states such as California and Arizona mean that at foreclosure or on a short sale, the bank holding the note has no opportunity to pursue you. Whatever money they received at the closing is it, no lawsuits and deficiency judgments to hound you in the coming years.
If you live in Nevada, where I live, the banks have full recourse ability, so unless they waive their rights, they can come after you. I am not an attorney and this information should not be viewed as legal advice. I have been told by attorneys here that banks have the following recourse options to them.
Foreclosure: For purchase money (money used to buy or improve a home and not money pulled out as cash or home equity lines of credit) banks have six months to file legal action against you once the home is sold at auction on a short sale.
Short Sale: Unless the bank waives its deficiency rights they have up to 6 years. This doesn’t mean that they will, just that they reserve the right. In fact, the bank may just take the loss and write it off. In that case you will be receiving a 1099C (cancellation of debt). You’ll have to consult a tax professional but this essentially means the bank is showing their loss as your gain and will be treated as taxable income. What, if any tax liability depends on your individual tax situation.
If you are considering a short sale, you’ll need to consult an experienced short sale agent, attorney and tax professional versed in short sales.
Paul Rowe is the managing agent for the short sale department with the Sena team at North American Realty of Nevada. You may contact him or Tony Sena at 702-376-0088.