Dry Mortgage

A dry mortgage is a home loan whereby the lender’s only avenue of getting back the outstanding balance should the borrower default, is via the foreclosure of the property.

Also known as a nonrecourse mortgage, this means that the lender will not have to legal right to sue the borrower for a deficiency judgment to recover any amount of unsettled debt.

This can happen when the home foreclosed is valued less than the loan balance due plus the costs of foreclosure.

Because there is no personal guarantee given by the borrower and the only collateral is the property, the lender pretty much have no other courses of action to take.

Otherwise they might go after other assets belonging to the borrower.

In situations like these, lenders might be more receptive to loan modifications or short sales as such deals might actually enable them to recover more money than if they were to sell it in an auction.

Because of the risks involved, lenders don’t offer dry mortgages unless they have a very high level of certainty of a “good” loan.

Either that, or the property is highly valued with a low probability of it’s market value crashing.

Another way to avoid getting into such adverse circumstances is for the lender to simply demand a higher down payment.