Your state of residence will determine if you have a recourse loan. A recourse loan is an obligation where the borrower is liable for the full amount of the remaining balance of the loan, even if the collateral value is less than the remaining balance. Almost all refinanced loans, and home equity loans (HELOC) are considered recourse loans. If there is a recourse loan, a lender may sue borrowers to recoup loss. To be sure which type of loan you have read what it says on the Note!
In a nonrecourse state, borrowers are not held personally liable for more than the home’s value at the time that the loan is repaid. The lender may recoup some of its loss through foreclosure. However, the lender may not sue the borrower for additional funds. If the foreclosure sale does not generate enough money to satisfy the loan, the lender must accept the loss.
Each state has its own anti-deficiency statutes that prohibit lenders from seeking judgments. In a few cases, anti-deficiency statutes do allow lenders to collect a limited amount of money from the borrower (such as the difference between the debt and the fair market value of the property)
******Note however, that in some states (such as California) nonrecourse laws apply only to ‘purchase money’ loans (i.e. original home loans that are used to purchase property) .
Written by Hannah Fliegel