When to use a Nonrecourse Loan?

A nonrecourse loan is a type of loan in which the lender can only come after the asset if the loan goes into default. Here are a few things to consider about the nonrecourse loan and when you would want to consider using one.

Loan-to-Value Ratio

If you have a high loan-to-value ratio, you might want to consider getting a nonrecourse loan. Many times, the lender will not be able to sell the property for the full value after foreclosure. If you owe a large amount of money, you might end up owing more than the property can sell for. In that case, you would not want the lender to be able to come after you personally to repay the rest of the debt. This way, they can only get the house and then they will not be able to collect any more money from you.

Protect Assets

If you have additional assets that are tied up with your real estate investments, you may want to use a nonrecourse loan. For example, if you had real estate holdings in an IRA, the bank would not be able to come after the funds in your IRA if the house went into default.

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