Leverage Your IRA Investing With Non Recourse Loans

“Most successful real estate investors make their money by leveraging their properties with mortgages, not by paying all cash up-front and tying up all their available money. That kind of leverage is rarely available in an IRA because of the loan restrictions under the prohibited transaction rules,” explains Ed Slott, author of The Retirement Savings Time Bomb… and how to defuse it.



So why then are so many people switching their IRA funds into self-directed accounts to invest in real estate if they cannot take advantage of leverage with these

retirement funds? Slott provides us with the answer. “You can… get a mortgage on property purchased with your IRA funds… without a personal guarantee by you.” This is called a non-recourse loan. However, finding mortgage lenders willing to participate in this type of transaction may prove difficult.



Non recourse loans have traditionally been offered only by commercial lenders on commercial properties. And the problem is that commercial lenders won’t make these loans on residential properties and residential lenders think it’s too risky to offer it at all. So, is this loan really available and how does it work?



The answer is YES and the information that follows will hopefully insure that this information isn’t such a big secret anymore! Now, the guidelines of these non recourse loan programs are much stricter than the guidelines of your ordinary mortgage, but since it’s the only loan program that you can use to leverage your IRA money, it’s worth exploring.



Non Recourse Loan Program Guidelines

 Non-recourse self-directed IRA loans for use with a custodian or an LLC

 Available in all 50 states

 2% Points

 Up to 70% LTV for 1-4 Family using a 3/1 or 5/1 ARM

 Up to 65% LTV for condos

 Debt Service Coverage Ratio (DSCR)* of 1.2 for 1-4 Family, 1.25 for Multifamily and Commercial R/E

 No prepayment penalties

 Purchase and refinances - even cash out - are allowed

 Minimum loan amount is $50,000

 Asset reserves within IRA are required

 Taxes and insurance escrow is required

 Interest only is not available

 Appraisal fee required at the time of loan application for 1-4 family

 Timeframe from loan application submission to closing is approximately 45 days



* Debt Service Coverage Ratio = Net Operating Income/Annual Debt Service



Special Guidelines:

Price appreciation: If the real estate has sold within the past 3 years and the property has appreciated more than 10% annually, the DSCR must be 1.2 times and the LTV will be 50-65%.





Condo Guidelines:

Loan to Value for Condos will be between 50%-65% and the net operating income must exceed the annual debt service (annual principal and interest mortgage payment) by 20%. Condos must be warrantable.



The Non Recourse Loan Process

1. Complete the loan application and Broker Fee Disclosure.

2. Submit the following items to the broker:

• Loan Application

• Broker Fee Disclosure

• Non-refundable check for appraisal.

• IRA funds statement verifying that down payment, closing costs and reserves are currently deposited in the borrowers IRA account.

• If the IRA is an LLC versus using a custodian the following documents must also be submitted: Articles of Organization (certified by Secretary of State), LLC Operating Agreement, Certificate of Good Standing (order from the Secretary of State and Member Resolutions authorizing the mortgage of the property and if a corporation is on the note, authorizing the borrowing of money.

3. We will complete the processing, order the real estate appraisal, underwrite the loan and coordinate the closing between you and the title company/escrow agent.

4. We will quote the rate and terms based on the type of property that is being purchased as well as calculation of the Debt Service Ratio (DSR).

5. Typical terms are up to 70% LTV for SFR properties. Less for condos.

6. There is no prepayment penalty.

7. 3/1 or 5/1 ARM product is available for these types of loans. Interest only is NOT available.

8. Reserves are required. How much depends on property type and DSR calculation. Estimate 10% of loan value in IRA assets.

9. Timeframe is 45 days from receipt of application and other forms listed above.

10. Ineligible properties include:

• Residential with large acreage

• Raw Land

• Farms

• Manufactured or Log Homes

• Non-warrantable Condos

• Condo-Hotels

• Co-Ops

• Time Shares

• Hotels

• Senior or Assisted Living Facilities

• Non-Franchise Restaurants

• Entertainment Properties

• Mini-Storage Facilities



And there you have it – everything you have ever wanted to know about non recourse loans for residential investment properties in a nutshell.