WHAT IS A NON-RECOURSE LOAN?
A non-recourse loan is a loan where the borrower is not personally liable for repaying any outstanding balance on the loan, but the loan has to be secured by offering collateral, which would be the real estate property. If the borrower does not repay their loan, then they lose their collateral but are not responsible for repaying the outstanding balance on the loan. If the loan remains unpaid, the lender has no option but to foreclose on the property. A non-recourse loan can be summed up like this:
- You put up collateral as an assurance that you will pay off your loan in a timely manner
- A non-recourse lender gives you a loan
- If you can’t pay it off, you lose your collateral
One of the biggest benefits of a non-recourse mortgage loan is that the borrower is not held personally responsible for the loan, since the non-recourse loan provider can only seize the collateral associated with the loan and nothing else. A non-recourse IRA loan is secured by the collateral. What this means is that in the event of a default, there is absolutely no recourse or ability to collect the mortgage loan from the IRA owner personally or the IRA itself.
The Difference Between A Non-Recourse and Recourse Loan
A recourse loan is a type of debt in which a lender can hold the borrower personally liable for repaying the debt. With recourse loans, the lender can pursue repayment of the loan beyond the original pledged collateral (which would be the property that was purchased). If the borrower fails to repay the loan according to the obligation, the lender can take legal action in order to fully collect what is owed, like garnishing wages, levying accounts, and any other collateral.
Prohibited Investments
When the IRS established the rules for IRAs back in 1975, they declared three basic types of prohibited investments:
- Life Insurance
- S Corporations
- Collectibles (stamps, artwork, rugs, guns, coins, and other types of personal property)
The IRS has also established regulations regarding Prohibited Transactions between your IRA and certain people that are classified as a “Disqualified Person.” Most all other assets are available as IRA Investments as long as your IRA Custodian is in agreement.
Benefits of a Non-Recourse Loan
As discussed above, a non-recourse loan is a type of loan that you can take out using your IRA to purchase real estate investments. These loans are owned by your IRA and are subject to UDFI, or unrelated debt-financed income, and must be repaid through your IRA. While they help you finance your real estate investment, there are also other benefits of non-recourse loans.
Your IRA is Liable For Your Loan, Not You
When you open a non-recourse loan, your IRA owns it, not you, which means that you will not be held personally liable should anything happen over the life of the loan.
There Is No Recourse Against You if You Default
As opposed to a recourse loan, there is no financial backlash if you default on your non-recourse IRA loan. You are protected as well as your IRA, so the lender cannot take anything from you, with the exception of your collateral.
In Case of a Default, Only the Lender Can Seize the Collateral
Should you ever default on your loan, you will only lose your collateral and nothing else. Since the loan is for your IRA, your credit will not drop, and you will not lose any additional assets except for the property.
Purchase Real Estate With Your IRA
Did you know that the ability to buy real estate with your self-directed IRA is allowed and has been for quite some time? Since 2008, First Western Federal Savings Bank has been a nationwide non-recourse loan lender of choice, with a specialty in helping people purchase real estate with their self-directed IRAs. Yet, for all of us at First Western Federal Savings Bank, non-recourse loans are more than just our specialty — they are our passion.
There are several types of property that you can acquire through a non-recourse loan, and our non-recourse loan lenders can help you get there. Your non-recourse lender will give you the loan you need to acquire the property, and you will put up collateral as a way of promising to pay your loan on time. If you don’t pay your loan on time, the lender can take your collateral. The types of real estate that you are able to invest in with your non-recourse loan includes:
- Residential Property - This is one of the most popular types of property that can be bought with your non-recourse loan. In addition to houses, condominiums and townhouses can be purchased with a non-recourse loan.
- Commercial Property - With your non-recourse loan, you can invest in property like a storefront, officespace, or some other form of headquarters.
- Multi-Unit Property - Multi-unit property, or a multi-family home and apartment building, can also be purchased with your self-directed IRA. Investing in apartment buildings can be a highly lucrative business deal.
- Agricultural Property - Invest in agricultural property with your non-recourse loan. A lease contract can also be implemented when crops or livestock are utilized on the agricultural property, and this setup can actually be used to help generate income.
What types of property can I buy with a non-recourse mortgage loan?
The point of buying real estate with a mortgage loan is for it to generate income. Here are the four main types of properties that can be purchased with your IRA loan:
Residential Property
This type of property includes single family residences, including condos and townhomes.
Commercial Property
This type of property typically houses businesses, offices, or retail stores.
Multi-unit Property
This type of property refers to things like multi-family homes or apartment buildings.
Agricultural Property
Purchasing Rental Property With Your Non-Recourse Loan
The demand for rental property across the United States is growing, and there is market data to confirm that this trend will continue to grow. Its relevance creates a significant avenue for investors to grow wealth and experience financial success by investing in real estate. Purchasing rental property with your non-recourse loan creates a whole new avenue for financial possibilities, which will add tremendous value to your retirement asset and your investment portfolio as a whole. Learn more about purchasing rental property with your loan.
Purchasing Vacation Rental Property With Your Non-Recourse Loan
Whether it is a beachfront property or a rustic cabin in the woods of Colorado, purchasing a vacation property will provide you with a huge return on investment. Why? Well, the increase in vacation rental properties is predicted to take over the hotel industry. Further, studies show that in recent years, more people are traveling and more frequently as well. To keep up with the number of families going on vacation, vacation rentals are growing in popularity, so don’t miss your chance at purchasing a vacation rental and planning for your retirement. Contact our non-recourse loan lenders today to learn more.
HOW TO BEGIN
- Establish an account with a self-directed IRA custodian.
- Find an acceptable income producing property that meets your investment goals
- Execute a purchase agreement in the name of your IRA according to your custodian requirements.
- Apply for a Non-Recourse Loan with First Western Federal Savings Bank
- Complete a "Direction of Investment" form directing them to fund your purchase with your IRA funds
Contact us today and see how your premier non-recourse loan lender, First Western Federal Savings Bank, can help you buy real estate with your self-directed IRA. Your non-recourse loan is waiting — apply today!
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