What makes a self directed IRA so attractive compared to regular IRAs? Options! There are many different investment options with a self directed IRA that are not available through regular IRAs. One option available through a self directed IRA is leveraging the IRA. This is a great option but you need to be careful that you do it properly.
The IRS does not permit the IRA owner to personally guarantee a mortgage for the purchase of property with their IRA. The majority of banks that issue mortgages require a personal guarantee for those loans. This is called RECOURSE LOANS. Under normal circumstances, if the mortgagee (property owner) cannot or does not meet the payment requirements of the mortgage, the bank can use whatever legal means at its disposal to obtain payment from the mortgagee.
The bank can sue the property owner and obtain that individual’s personal assets to satisfy the mortgage debt. As a result, most banks will NOT lend money to purchase real estate through an IRA, because they cannot obtain that personal guarantee from the borrower.
The only ‘recourse’ the bank has to satisfy the mortgage debt incurred by the IRA is the property and the rental revenue that the property generates. Therefore, the IRA owner must obtain what is called a NON-RECOURSE loan in order to purchase real estate if they cannot pay the entire purchase price in cash.
The use of non-recourse loans in conjunction with IRAs is relatively new. However, there are many lenders now seriously considering the non-recourse loan to an IRA. Historically, the risk to the lender is negligible. Non-recourse loans are also less cumbersome.
There is no income verification and the rate is not based on any credit report or credit scoring. It is also possible to refinance a property that an IRA already owns with the proceeds being returned to the IRA account. Closing costs and associated fees are similar to traditional recourse loans.
If you have any more questions about leveraging inside of an IRA feel free to comment below, call me or email me. I also have some non-recourse lenders that I can recommend.
Author: Ben Barker, Self Directed IRA Professional