How to protect assets in a recourse loan? Or is non-recourse best

Question

We are deciding between several loan options in the ~75% LTV range.

Non-recourse options are ~1% APR higher than full recourse.

We are also leaning towards fully amortized 30 year options, as opposed to their 5 and 10 year counterparts, looking at ~6.75% APR for 30 year full amortization vs 5.75% for a 5-year interest only vs 6.25% for a 10-year io. We are leaning towards the 30 year for long term stability and locking in rates. My only concern is that if we want to refinance within 5 years we would have gained nothing by going 30-year, but we like the stability.

I want to keep my family safe in case of default, but I don't want to be any more safe than I have to be.

Ways I think we can reduce our risk:

30-year fully amortization option, our risk of default goes down significantly compared to 5 and 10 year options. We won't be forced to refinance or sell at any point unless we cannot meet our monthly debt obligation. The 5 and 10 year options on the other hand could leave us stuck at the end of term in the middle of a recession, then we would be SOL, right?

Are there any legal measures that I can take to protect personal and business assets in case of default of a recourse loan? I have heard whispers of utilizing a corporate umbrella, or a private REIT, and will begin researching the subjects further.

Any advice would be greatly appreciated!

Thanks gang!

Jerry W. · Answer

@Ben Bakhshi, I haven't seen you around for awhile.  Here is a way to limit liability for some of your assets, it is what my wife and I do.  First I am the only owner of my corporation.  My wife is not an officer or a shareholder and I am the only one to get a K1.  My wife is very risk adverse, and does not like my investing in real estate, especially where it involves loans.  I have a lot of loans, my payments are much more than I could pay from my day job.  If the local economy tanked and I could not rent any of my houses I would obviously go bankrupt.  Now I must personally guaranty all my loans from the bank.  If I default and they get say a $500K deficiency judgement they could garnish my wages, attach my bank accounts, etc.  However my wife and I own all of our real property as tenants by the Entireties.  This means that no creditor can attach the property unless both me and my wife owe on the debt.  It is a big deal in bankruptcies.  None of my retirement money is able to be attached it is exempt from creditors.  I do have assets that are in my name only that could be attached like a few rental houses, some cars, a few bank accounts, etc.  If I declare bankruptcy then my wages cannot be garnished either.

It may work better for you to have both of you own rental property, but you might consider only you owning it and keeping your primary house and paid off units as tenants by the entireties.

There is a lot more to this, I have given a pretty simple version, but hopefully you have the idea.

Jay Hinrichs · Answer

@Ben Bakhshi  is this owner OCC loan or investment loan.. lenders tend to do nothing on recourse loans with owner occ and tend to chase after with non owner loans.

also depends on the state if its an owner occ and its a purchase money loan.. NO defiacancy is allowed.. check your state rules.. like I don't know each and every state were this is the case but I can tell you that its the law in CA OR WA NV... and many times foreclosing does not create  a lein it takes a separate action to get the judgement and that is what the banks rarely do. I have done them against my borrowers though.

Also if you have enough assets to protect would you not have the money to just pay the loan off. ?

Asset protection is usually for those with SIGNIFICANT assets.. not just tyring to hide 50 to 100k or their car or something. couple things to check on.  But if your really worried aobut it go with the higher rate non recourse.. and sleep well.

Dave Toelkes · Answer

What happens when you default on a recourse loan?  If there is a deficiency after foreclosure, the court issues a judgment in favor of the lender.  The judgment is recorded and then becomes a lien on any other property that you own in the the county where the judgment is recorded.  When you sell that other property, your judgment creditor get paid including accrued interest from the time the judgment was awarded.  In most jurisdictions, the judgment expires after ten years and can be renewed once.

Most of the time, judgments are not actively enforced.  In the rare instance that a deficiency judgment might be actively enforced, you might be able to negotiate a heavily discounted payoff.

Let us know if your research suggests the impact of default on a recourse loan is more severe than I described.