Posts Tagged ‘lending’

A Guide to Non-Recourse Loans in an IRA

Monday, June 19th, 2017

What is a non-recourse loan?

When real estate is purchased through a self-directed IRA using leverage, the IRS requires a non-recourse loan. The main difference between a non-recourse loan and a recourse loan is which assets a lender can go after if a borrower fails to repay the loan. Non-recourse debt is usually limited to a 50-60% loan-to-value ratio.

The IRA holder is not personally liable for repaying the loan when through an IRA. How it works is that when you lock down an individual lender or a bank, they then lend your IRA the funds. Never to you personally. In the event of a default, neither you or your IRA are liable for repayment. The lender can only recover the asset that was purchased, and the equity therein.

What’s the difference?

How do you choose between a non-recourse and a recourse loan? The difference in both types of loans is best defined by the terms. So if money is still owed after the collateral is seized and sold in a recourse mortgage, the lender can then attempt to have borrower’s valuable assets seized or sue to have their wages garnished. If you have your IRA paired with a non-recourse mortgage, however, the lender is usually the loser. If the asset doesn’t sell for what the borrower owes, the lender absorbs the difference and cuts ties.

While IRA holders might find it tempting to seek out non-recourse loans for future purchases, it is important to remember that these loans are not without some fault. Non-recourse loans typically come with higher interest rates and are given to individuals and businesses with high credit scores. It can be tricky to be approved. Additionally, failure to pay off a non-recourse debt may leave other assets unharmed, but the borrower’s previously mentioned high credit score will definitely be negatively impacted. Just as the borrower’s credit score would be impacted by the failure to repay a regular loan.