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Understanding Non-Recourse Promissory Note: A Borrower's Shield
Definition & Meaning
A non-recourse promissory note is a type of loan agreement that limits the lender's ability to seek repayment from the borrower beyond the collateral specified in the note. In the event of a default, the lender can only claim the asset assigned as collateral, such as a property, and cannot pursue the borrower for any remaining balance. This arrangement provides an extra layer of protection for borrowers, as they are not held personally liable for the entire loan amount if they are unable to repay it.
Table of content
Legal Use & context
Non-recourse promissory notes are primarily used in real estate transactions, particularly for mortgage loans. They are common in situations where borrowers want to limit their financial risk. Legal professionals may draft these notes to ensure that the terms are clear and enforceable. Users can manage these agreements through templates available on platforms like US Legal Forms, which provide ready-to-use legal documents.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A borrower takes out a non-recourse mortgage to purchase a home. If they default on the loan, the lender can only take the house as repayment and cannot pursue the borrower for any additional money owed.
Example 2: A real estate investor uses a non-recourse promissory note to finance a rental property. If the property value decreases and they default, the lender can only recover the property, not any other personal assets of the investor. (hypothetical example)
State-by-state differences
Examples of state differences (not exhaustive):
State
Non-Recourse Loan Availability
California
Commonly used in residential mortgages.
Texas
Allows non-recourse loans for certain types of mortgages.
Florida
Non-recourse options are less common; typically requires additional agreements.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Difference
Recourse Promissory Note
A note allowing the lender to pursue the borrower's personal assets in case of default.
Unlike non-recourse notes, recourse notes hold the borrower liable for the full amount.
Secured Loan
A loan backed by collateral.
Non-recourse notes specifically limit lender recovery to the collateral only.
Common misunderstandings
What to do if this term applies to you
If you are considering a non-recourse promissory note, it is important to understand the terms fully. Make sure the collateral is clearly defined in the agreement. You can explore US Legal Forms for templates to help you draft a non-recourse promissory note. If your situation is complex, consulting with a legal professional is advisable to ensure your interests are protected.
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