A non-recourse loan is a loan where the lenders are allowed to foreclose on the collateral pledged for the loan, if the borrower defaults on their obligations and fails to pay their debts. Lenders are allowed to take possession of any assets used as collateral to secure these loans, and unlike recourse loans, only the collateral will be taken if the borrower defaults. Recourse loans favor the lender, and non-recourse loans favor the borrower. 


The real distinction between the two arises if money is still owed on the debt after the collateral is sold. If there is still a balance remaining on the debt after the collateral is sold, then recourse loan lenders will go after other assets owned by the owner. Non-recourse loan lenders, however, are prohibited from going after a borrower’s other assets even if there is an outstanding balance after the collateral is sold.  


When you work with First Western Federal Savings Bank, you are working with one of the nation’s top non-recourse loan lenders with more than 40 years of experience. Furthermore, we can help you use your non-recourse loan in tandem with your self-directed IRA to provide you with the means of purchasing real estate. Contact our team today for more information. 


Understanding Non-Recourse Loans

As briefly stated above, the non-recourse loan favors the borrower because should the borrower default on a payment, then the lender cannot go after additional assets after the collateral is foreclosed on and sold. Even if there is an outstanding balance that remains on the debt, the lenders are prohibited from going after other assets the borrower owns. In this instance, the lender of the non-recourse loan must absorb the difference and walk away. 


The IRS regulations state that any debt incurred by a Self Directed IRA or Solo 401(k) must be non-recourse debt. So if a Self Directed IRA or Solo401(k) or an LLC where the Member is a Self Directed IRA or Solo401(k), the loan must be a non-recourse loan.


Non-Recourse Loan Debt

In addition to prohibiting the lender from going after assets beyond the collateral if the borrower fails to pay off their non-recourse loan, there is a chance of the resale value of the collateral dipping below the loan balance over the course of the loan. This is even more of a risk for non-recourse loan lenders, so it is no surprise as to why there are higher interest rates on non-recourse loans, as it is, in most cases, compensation for the elevated risk. 


On recourse loans, if your debt is canceled by the lender following a foreclosure, meaning that you don’t have to pay off a certain portion of the debt, you may be required to claim the portion of the debt that has been forgiven as income on your taxes. However, there are no tax implications if you have a non-recourse loan. 


Carveouts and Non-Recourse Loan Limits

Sometimes lenders can seek recourse on non-recourse loans, as most non-recourse loans feature some carveouts, sometimes referred to as ‘bad boy’ acts that give the lender the ability to seek recourse. Standard carveouts are disclosed in the loan documentation, but typically include things like fraud, misrepresentation, or criminal acts that result in property’s seizure. 


Before closing on any deal, borrowers should review their loan documents closely so as to understand the terms of their non-recourse loan. Your loan originator, like your team at First Western Federal Savings Bank, can serve as helpful points of contact for any questions about how specific terms may or may not best support your investment strategy. 


Real Estate Financing Options With a Non-Recourse Loan

When your non-recourse loan is secured, you can use it in tandem with your self-directed IRA as leverage in their investment. In this case, the secured loan is backed by the collateral that is typically the property that it is being used to purchase. Non-recourse loans are often used by Self Directed IRA owners or Solo401(k) owners who want to invest in real estate but do not have all the funds in their account needed to purchase the property outright.   


The ability to buy real estate with your non-recourse loan and your self-directed IRA creates a significant avenue for investors to grow wealth and experience financial success. This creates a whole new avenue for financial possibilities, which can add tremendous value to your retirement assets and your investment portfolio as a whole. Furthermore, you can also invest in vacation property, which can also provide you with cash-flow and gains on your investment. Studies have shown that more people are traveling, and more frequently at that, so it may be time to discover all of the possibilities. 


Qualifying For a Non-Recourse Financing

Because of the increased risk of non-recourse financing, commercial lenders often only accept certain property types and classes for non-recourse financing. First Western Federal Savings Bank states that the property you can buy with you non-recourse mortgage loan includes:

  • 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 – This type of property can be purchased and can generate income with a lease contract. It typically supports crops or livestock. 


When purchasing real estate, property income, both past and present, are determining factors, as well as the requested amount of leverage.   

Non-recourse loans are a great way to diversify your investment portfolio, especially when used with your self-directed IRA. if you have any questions at all about non-recourse loans, or would like to speak with our non-recourse loan lenders to learn how you can get started, contact us today.