What is a non-recourse loan?

A non-recourse loan is a loan made to a retirement account where there is no personal guarantee made by the borrower, in this case the IRA. Additionally, the IRA owner does not personally guarantee the debt either. So a non-recourse loan, in short, asks for no personal guarantee of any kind.

Will a bank or private lender really lend money with “no recourse?” Not exactly. Non-recourse is kind of a misnomer. A better name would be a “limited recourse loan.” The reason why is this. Lets say your IRA borrows money to purchase a piece of real estate and fails to make the loan repayment. What recourse does the lender have? The lender can take back the property for full and complete satisfaction of the debt but nothing more. There is no additional recourse to the IRA or the IRA owner. Even if your IRA owns other assets, (including cash) the lender cannot ask for a judgment against these assets.

Is it really legal to borrow money in an IRA?

Yes, so long as it is done according to the rules. For more information on the rules regarding IRA’s you can consult IRS Publication 590. IRS Publication 590, page 45, states that you “cannot use an IRA as security for a loan.” Notice it does not say your IRA cannot borrow money, only that it cannot be used as collateral or to secure a loan. Therefore, we need a special kind of loan commonly referred to as a non-recourse loan. This is the only type of loan that complies with current IRS guidelines.

How can a non-recourse loan benefit you?

Non-recourse loans inside of self-directed IRA’s can be the most advantageous loans to have. Here are 6 reasons why.

  1. What if you don’t have enough money in your IRA? You want to make a real estate investment but do not have enough money to pay cash? With a non-recourse loan your IRA can now borrow the money!
  2. You are no longer limited by annual contribution limits. With a non-recourse loan you are not limited by a dollar amount or a contribution limit. Borrowing money in your IRA is a legal way to get more cash in your account to invest and grow it.
  3. Use OPM. Using “Other People’s Money” isn’t just a wealth building strategy outside of your IRA. With a non-recourse loan its now a strategy inside your self-directed IRA.
  4. Asset Protection. You are not putting any of your other hard earned assets at risk because there is no personal guarantee allowed and the only asset at risk is the one with the loan tied to it.
  5. It doesn’t show up on your credit report. Why? Because you are not the one borrowing the money, your self-directed IRA is.
  6. No credit? Poor credit? It doesn’t matter. The reason is you are not borrowing the money, your IRA is. Therefore, lenders typically only look at the transaction itself and not the person putting the transaction together.

What are the common ways to find a non-recourse loan?

Chances are your bank down the street will not lend money to your IRA. Non-recourse loans to self-directed retirement accounts is a specialized area of lending. Don’t worry, we’ve got you covered. Here are 5 common ways our clients find a non-recourse loan for their IRA or other self-directed account.

  1. North American Savings Bank – North American Savings Bank is a Federal Savings Bank that offers non-recourse loans to self-directed retirement accounts in all 50 states.
  2. First Western Federal Savings Bank – First Western, like NASB, is a portfolio lender with special programs for self-directed IRA’s.
  3. B2R Finance – B2R Finance is a company that specializes in extending loans to real estate investors. As with other lenders listed here, B2R offers recourse and non-recourse loan options.
  4. Hard Money Lenders – If you are working with a hard money lender some will lend money non-recourse to your self-directed retirement account. Contact your hard money lender and ask if they will extend a loan to your IRA.
  5. Private Lenders – Private lenders (colleagues, friends, neighbors, professionals you work with) can lend to your self-directed retirement account as well. As a matter of fact, an individual can lend money from their IRA to your IRA! To learn more about working with IRA private lenders go to the Specialized IRA Services B2B page.

What are typical terms on a non-recourse loan?

This is very specific to who your self-directed IRA is borrowing money from. There are no hard and fast rules. A private lender could lend 99% of the money to your IRA and make it a balloon note at 6% at the end of 12 months. It’s completely dependent on what works for you and them.

If you were to go to a bank as an example. Here’s what you may find to be typical.

Down Payment: 30% to 40% depending on the type of property.
Interest Rate: Depends on current interest rates but typically 4% to 8%.
Time to close: 30 days or less
Types of loans: 5 year ARM’s up to 25 year fixed loans
Cash out Refinance: Yes. Typically lenders will offer this option.

What types of properties are eligible for a non-recourse loan from a bank?

  • Single Family Residential
  • Warrantable Condo’s (100% complete, 33% or more sold, and HOA turned over by developer)
  • PUDs/Townhomes
  • Duplexes
  • 4-Plexes
  • Multi-Family (5 or more units)
  • Commercial Property: including retail, warehouses, and office buildings.

What else do you need to know about non-recourse loans?

Non-recourse loans trigger unrelated business income tax (UBIT). In the scenario of borrowing in the IRA it is referred to unrelated debt financing income (UDFI). In this case a tax return would need to be filed for the IRA called a 990t.

There are also strategies that can be used to reduce or eliminate this tax if you plan ahead. For more information contact a Specialized IRA Services expert.

Other common terms used to describe non-recourse loans

  • Gap Funding
  • Private Money
  • Private Lending
  • Private Notes
  • Private Mortgages
  • Hard Money Loans
  • IRA Lending
  • Balloon Loans

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