Understanding Recourse and Non-Recourse Home Financing in Texas

Texas homebuyers need to make sure they understand the financing they are using to buy or refinance their home. One of the most crucial things to understand is if the loan is a “recourse loan” or a “non-recourse loan.” Let’s briefly explain the difference between these types of loans and how they impact Texas homeowners.

Recourse Loans

When you have a recourse loan, that means that you have put up collateral to secure a loan. If, for some reason, you fail to pay the loan back, then the bank or other financial institution can seize the collateral that you provided.

Then, if the collateral is worth less than the debt and its value doesn’t make the bank whole, the bank can also come after you for the remaining loan amount. The bank may file a lawsuit against you, and it can seize other assets, place a lien on bank accounts, or even garnish your salary until the debt is repaid in full. 

Non-Recourse Loans

A non-recourse loan may initially appear to be the same as a recourse loan. In both, the borrower provides the lender with collateral for the loan.

And just as in the case of the recourse loan, if you fail to pay the debt, the bank can seize your collateral.

However, that’s all the borrower can do in a non-recourse loan. They can’t sue you or go after any of your other assets. The borrower is only entitled to the collateral and no additional payment, even if the collateral is worth less than the remaining loan.

How This Works in Texas

Texas is a “non-recourse” state when it comes to home mortgages. Therefore, unless there’s fraud, lenders can seize a borrower’s collateral, but nothing else, to repay a loan.

On the other hand, if a borrower has refinanced a home loan, the refinanced home loan may be a recourse loan subject to further collection efforts.

In Texas, some unscrupulous lenders promote non-recourse loans as being difficult to get and more costly—when, in most cases, they’re required by law.

If you are uncertain about a proposed mortgage or dealing with a lender threatening to take legal action against you for failing to repay your loan, get an attorney to review your case and explain your options.

Contact Manfred Law through our website or call our Houston office at (713) 547-5460. We’re ready to help.