Non-recourse loans provide the borrower with an added measure of protection. When the loan defaults or other issues arise, non-recourse loans prevent the lender from using the borrower’s other assets such as their income to make up for any loss that may have occurred. Non-recourse loans are an attractive option for many borrowers because it is a loan that will give them the best coverage if things start to go wrong with their payments.
The point of recourse versus non-recourse is much more than just the protections or the lack thereof that they provide. What happens tax-wise if you choose one or the other? Is a non-recourse loan taxable? In order to answer those questions, you should first understand what a non-recourse loan is and how to obtain one.
If you are confused about non-recourse loans, Silver Dollar Financial can help. We provide you with expert help and guide you through any of your questions. We carry with us years of professional experience and can give you the assistance you need 24/7 any day of the year. Contact us at (844) 871-0628 to learn more.
What a Non-Recourse Loan Is
Non-recourse loans give borrowers peace of mind. In the event of a loan defaulting, non-recourse loans stop lenders from recuperating any potential losses at your expense. Non-recourse loans are a great way to ensure that all of your other assets will remain safe even when you default on a loan.
Nolo provides a great example of how non-recourse loans work by using home mortgages. Let’s say you default on your mortgage, and you owe $400,000. The bank then sells your home but could only sell at $350,000, which would not cover the balance. If you do not have a non-recourse loan, the bank can get a deficiency judgment and demand payment of that deficiency through other means such as wages or other assets.
Non-recourse loans prevent these kinds of situations and will allow you to move on from a defaulted loan without having to worry about making up for any additional losses. This is why most lenders tend to be hesitant when giving out non-recourse loans because of the lack of protection on the lender side.
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Qualifying for a Non-Recourse Loan
Non-recourse loans vary widely by state. Some states such as California, Oregon, North Carolina, and others all automatically make loans, mortgages specifically, non-recourse. However, it is not this way for other types of loans, and you must apply and qualify for a non-recourse loan. Qualifications can be hard to meet, and there are very stringent requirements involved.
As mentioned previously, these requirements are stringent because the lender takes a risk by issuing a non-recourse loan. Should an unfavorable situation arise with the loan, they will not be able to seek a deficiency judgment to regain any loss.
Non-recourse loans are usually not easy to obtain. They require an excellent credit score, a low debt to income ratio, and financial stability. Non-recourse loans also tend to have higher interest rates as well due to the risk involved with the lender. While the barriers to entry may seem high, a non-recourse loan is an optimal option to choose because it is very borrower sided.
Non Recourse Loans Are Not Taxable
There are many differences between recourse and non-recourse loans, and one of them is taxation. When a recourse loan defaults and the debt is forgiven or canceled, the debt amount can still be considered taxable income on your 1099-C. The opposite is the case for non-recourse loans as you would not have to worry about taxation in general.
Non-recourse loans are treated differently by the IRS. When debt is forgiven or canceled, that amount will not be taxed. Essentially, you are free from any potential taxes from a non-recourse loan defaulting. While there can be some exceptions to this, non-recourse loans are tax-free on a general principle.
Non-recourse loans being tax-free is a great plus. Defaulting on a loan is never optimal, but with non-recourse loans, tax is avoided, and you can focus on your financial well being.
Non Recourse Loans and You
Always keep in mind that while non-recourse loans offer many protections and benefits, defaulting on any loan, in general, is bad. This is why you should always strive to never have to use these benefits in the first place. Even still, when unforeseen circumstances occur, it is best to be prepared and ready to minimize your loss. While recourse loans are very common and not inherently bad, a non-recourse loan can be a great way to safeguard yourself.
Non-recourse loans are the best choice to protect yourself and your money. When it comes to situations involving pre-settlement funds, a non-recourse loan is a great option to pursue to ensure you have the funds to be comfortable and secure if your trial is stalled. Silver Dollar Financial can provide non-recourse loans to help fund you during challenging times. We make it easy and quick for you.