A non-recourse loan is a loan where the IRA account holder is not personally liable for repayment of the loan. The loan is in the name of the IRA, not the individual IRA owner. In the event of default or foreclosure, the lender can look only to the property as the source of repayment— the IRA owner’s other assets are excluded. The non-recourse lender cannot legally pursue personal assets owned by the account holder or the IRA. You can see why this would be an attractive option for Real Estate IRA Investors.
With over 6 years of experience working with IRA investors and non-recourse lenders, I have seen it all. Here are a few things I recommend you keep in mind.
To get a non-recourse loan, you must first have an established self-directed IRA. If you don’t have a self-directed IRA, an IRA Resources representative can help you establish an account. To begin the loan process, research all lenders before you apply for the loan. Most banks do not offer these types of loans, and large national banks will not even allow a real estate IRA transaction. IRA Resources has a list of non-recourse lenders we have worked with in the past, which we would be happy to provide upon request.
Loan terms can vary from a 3-, 5-, or 10-Year ARM, to a 10-, 15-, 20-, or 30-Year Fixed, or even a 25-year, fully amortizing loan with no prepayment penalty. The loan terms will vary from lender to lender, depending on the individual situation and investment.
Requirements and Restrictions
Though every lender has different requirements, some requirements are similar. Here are some things to keep in mind no matter what lender you end up choosing:
- Depending on the lender, some properties may not be eligible for a non-recourse loan. This varies between lenders, so clarify with the individual loan servicer when applying.
- Not all lenders offer nationwide loans— make sure your lender meets your individual needs before proceeding.
- Your IRA will need to have enough funds available for closing costs and reserves, beyond the property price. How much you need to keep on hand varies depending on the individual lender.
- The property must be held in the name of the IRA and not the IRA owner.
- Although your personal credit does not come into play with a non-recourse loan, you may be asked to provide personal information for you and your spouse.
- The property must be an income producing investment. Properties must meet the debt service coverage ratio – net operating income/annual debt service. This means that the property must have a positive cash flow, after the rent is “discounted” for vacancies, utilities, etc.
- The lender will ask for an appraisal. The appraisal needs to be paid from the IRA funds, not personal funds. The IRA is responsible for all income and expenses (including inspections) during the purchase process and beyond.
- With hazard insurance, you will need to provide contact information for an insurance agent for the proposed property, and the insurance must be titled in the name of the IRA. Insurance in your name personally will not be accepted by lenders.
- The lender may require that the “loss payee” clause of hazard insurance be in the lenders name.