Detailed Definition
A Dry Mortgage or Nonrecourse Mortgage is a financing arrangement where the borrower is not personally liable for the loan beyond the collateral used to secure it. In the event of default, the lender’s only remedy is to seize and sell the collateral, typically the property itself. If the sale of the collateral does not fully cover the outstanding loan balance, the lender cannot pursue the borrower for the remaining amount.
This type of mortgage is particularly attractive to borrowers who wish to limit their personal financial risk. It is primarily used by investors and in commercial real estate transactions.
Examples
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Commercial Real Estate Purchase:
- A commercial real estate investor obtains a nonrecourse loan to purchase an office building. If the investor defaults on the loan, the lender can foreclose and sell the office building but cannot go after the investor’s personal assets.
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Large Scale Residential Projects:
- A real estate development company uses a dry mortgage to finance a large apartment complex. If the project fails and the property’s value does not cover the total loan amount, the lender’s recovery is limited to the proceeds from the sale of the apartment complex.
Frequently Asked Questions
1. What differentiates a dry mortgage from a recourse mortgage?
- In a recourse mortgage, lenders can pursue the borrower personally for any remaining loan balance not covered by the sale of the collateral. In a dry mortgage, lenders have no such recourse.
2. Who typically uses dry mortgages?
- Investors and commercial buyers who want to limit their risk, as well as real estate developers, often utilize dry mortgages.
3. Are dry mortgages common for residential properties?
- While less common, some residential properties, especially high-value homes or investment properties, might be financed using dry mortgages.
4. Is approval for a dry mortgage harder to obtain than a recourse mortgage?
- Yes, lenders typically view dry mortgages as riskier and may require higher credit standards, greater down payments, and stricter terms.
5. Can interest rates on dry mortgages differ from those on recourse mortgages?
- Yes, interest rates on dry mortgages may be higher to offset the lender’s additional risk.
Related Terms
Recourse Mortgage
A mortgage where the lender has the right to claim the borrower’s personal assets if the collateral does not cover the outstanding loan amount in the event of default.
Collateral
An asset used to secure a loan that can be seized or sold by the lender if the borrower fails to repay the loan.
Foreclosure
The legal process by which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments, usually by forcing the sale of the property used as collateral.
Loan-to-Value (LTV) Ratio
A financial term used by lenders to express the ratio of a loan to the value of an asset purchased. For dry mortgages, a lower LTV ratio might be required.
Online Resources
- Investopedia - Nonrecourse Debt
- U.S. Department of Housing and Urban Development (HUD)
- National Real Estate Investors Association (NREIA)
References
- Investopedia. “Nonrecourse Debt.” Investopedia. https://www.investopedia.com/terms/n/nonrecourse-debt.asp.
- U.S. Department of Housing and Urban Development (HUD). “Overview of HUD Programs.” https://www.hud.gov/.
- National Real Estate Investors Association (NREIA). “Educational Resources for Investors.” https://www.nationalreia.org/.
Suggested Books for Further Studies
- “Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
- “Commercial Real Estate Investing for Dummies” by Peter Conti and Peter Harris
- “The Book on Investing in Real Estate with No (and Low) Money Down” by Brandon Turner
- “The Millionaire Real Estate Investor” by Gary Keller
