Many people know that purchasing a rental property is a great way to grow their financial portfolio. A non-recourse loan is the tool needed to make this investment happen. But when it comes to the process, the application, and the fine details of this type of loan, things can get a little more complex. Our lenders at First Western Federal Savings Bank are here to answer all of your questions about non-recourse loans — and if we left something out, we’d be more than happy to connect with you. Look through our FAQ page to get the answers you’re looking for, and contact our non-recourse loan lenders for additional information or to submit your application.
A non-recourse loan is a specific type of loan that leverages your self-directed IRA (solo retirement fund — not a retirement fund through another employer), used to purchase an investment property. The type of property you intend to purchase and what you intend to use it for both are important to know when applying for a non-recourse loan.
With a non-recourse loan, if you aren’t able to make payments on your mortgage, your property is repossessed. With a recourse loan, the same thing happens if you aren’t paying off your mortgage, but then any further debt that you still owe would need to be paid. A non-recourse loan protects the lendee more than a recourse loan.
There are three main things that are involved in the qualification for a non recourse loan.
The funds must be in your SDIRA or Solo 401(k) to put at least 40% down (some markets and properties require 50% down-payment), cover closing costs and still have at least 15% of the loan amount left in your SDIRA for reserves and contingencies.
The property must be in rent-ready condition or nearly so with no major deferred maintenance issues or rehab needed.
The property must generate positive cash flow to at least a debt service coverage ratio of 1.25 (meaning that Net Operating Income must be at least 125% of the principal and interest payments on the loan).
Properties need to be in rentable condition and marketable — they need to be investment properties. The property you look at cannot be purchased for you or a loved one to live in full time, it has to be able to generate income. Here are some examples of properties that work:
Residential property that can be turned into a rental
Property that can be turned into a vacation rental
Commercial property that can be turned into businesses, offices, or stores
Multi-unit property where multiple rooms can be rented out to tenants
Agricultural property that can be leased out, supporting crops or livestock (though this tends to be more difficult to qualify for a non-recourse loan)
You won’t qualify for a non-recourse loan if the property is/was:
Built before 1940
Outside the U.S.
Your primary or secondary residence — properties must be used for renting out, whether in a residential or commercial capacity
An apartment or row home that does not have its own roof
Less than $70,000
Additionally, residential properties with several acres, raw land and/or farms, log homes, and condos with less than 750 sq. ft. (per unit) are also not permissible.
If the property is in very good condition and all major components such as HVAC, plumbing, roof, electrical are up to code, then if you can provide a current Home Inspection, we can review that and if the home meets our underwriting criteria, we can sometimes lend on older properties.
We don’t. The property used as collateral for a non recourse loan must produce recurring cash flow to service all expenses of the property including any debt. We can lend on AG land with a lease.
The debt service coverage ratio (DSCR) calculates the returns that can be made to the IRA, or in other words, how successful your property will be at generating revenue. The DSCR is calculated by taking the net operating income, dividing that by the annual debt service (principal loan and interest). We consider a DSCR of at least 1.25 to be marketable.
However much the property you’re looking at costs, you need to have at least 30-40 percent of the purchase price in your self-directed IRA. Your lenders will look at your self-directed IRA when reviewing your application to see if you’re a good loan candidate.
If you own rental properties inside of your self-directed IRA, IRA LLSs, or Solo 401K Trusts (that meet the property requirements), you can! These properties need to be owned free and clear, or already have a non-recourse loan — if your property has a non-recourse loan and the loan is not through First Western Federal Savings Bank, you can still qualify for refinancing with us.
Yes, it is possible for two or more investors with self-directed retirement plans to go in with each other and purchase a rental property with a non recourse loan. The best way is to form an IRA LLC and have both of your IRAs as the members in the LLC. That way, we as the lender lend to one entity made up of both IRAs. And that LLC is then the owner of the property and all income and expenses flow through that LLC. That is the cleanest way to do it.
No you are not. Generally you can choose the tenants in your property and collect the rent checks which are to be deposited with your Custodian or Administrator. However, you cannot make any improvements to the property yourself or with your own labor. Sweat equity is not permitted. That means that any repairs to the property must be done by outside unrelated help and the funds to pay for those repairs must come from your IRA.
No you may not. You cannot receive any personal benefit by the actions of your self-directed IRA. So you cannot stay in the property, nor could you rent the property to a Disqualified Party per IRS rules (ie. lineal family members, such as a son, daughter, grandparent, spouse, etc.).
No it will not. The loan is made to your retirement plan, not to you personally. Therefore the debt will not show on your personal credit as an obligation. .
Yes you can. You can typically leverage up to 60% of your invested cost in the property. You may combine several properties together into the same loan to access even more funds for investment.
No there isn’t. You can apply for a non-recourse loan as soon as you purchase the property. Many investors find that in order to get the property under contract and close in this active real estate market that they must pay all cash. Then come back to us after they close for a non recourse loan.
Review our application, prepare the necessary documentation, and send everything to First Western Federal Savings Bank. You can mail it to our address (see below), or request a secure upload link by emailing one of our non-recourse loan lenders, which will then enable you to submit your application electronically.
We hope this has helped answer most of your questions about non-recourse loans, but if you still are looking for more information, please feel free to reach out to us! Understanding and applying for a non-recourse loan can be challenging, and we’re more than happy to clarify the details for you. Since 1979, the non-recourse loan lenders at First Western Federal Savings Bank have been helping people across the country grow and advance their investment portfolio. We’d love to help you do the same. Contact First Western Federal Savings Bank today to begin.