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.
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)
- 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 Trust Company 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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