Posts Tagged ‘non-recourse loan’

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.

Can You Leverage an IRA with a Self Directed IRA?

Wednesday, November 13th, 2013

Non-Recourse Loan

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: , Self Directed IRA Professional
[email protected]