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Access the largest knowledge base for Self-Directed IRAs. Expand your investor knowledge with articles, whitepapers, practical guides and tons of other educational resources.

About Entrust

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For 40 years, The Entrust Group has provided account administration services for self-directed retirement and tax-advantaged plans. Entrust can assist you in purchasing alternative investments with your retirement funds, and administer the buying and selling of assets that are typically unavailable through banks and brokerage firms.

What a Non-Recourse Loan Is

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Typically, when a borrower takes out a loan, the lender requires collateral pledged as security against the possibility of non-payment. If the loan isn’t repaid, the lender can seize the collateral. Collateral can include the asset purchased with the borrowed money, other assets, and/or bank accounts owned by the borrower.

A non-recourse loan is a type of debt that is secured only by the asset the loan finances. The lender has no other recourse, or ability to seize other assets if the borrower defaults on payments.

IRA holders cannot extend their personal credit to their IRAs. Thus, prospective investments must have sufficient income potential to convince a lender to fund a non-recourse loan. Most lenders will only fund multi-family real estate to mitigate risk.

Benefits of Using Non-Recourse Loans

Non-recourse loans can be a great option if you want to take advantage of an investment opportunity, but don’t quite have the funds to finance it. A non-recourse loan can provide the additional funds you need without putting additional collateral at risk. Asset protection is the most significant benefit of a non-recourse loan, as the loan shields unrelated assets if you default.

This is especially important for investors who use non-recourse loans to purchase real estate. For example, your IRA takes out a non-recourse loan to purchase a duplex that you intend to rent out. A hurricane damages the duplex. Rather than undertaking very expensive repairs, you decide to let the bank foreclose on the loan. The bank can seize only the duplex. It cannot go after the funds in your IRA.

Tax Implications

If your SDIRA purchases a property using a non-recourse loan, the debt financing transaction will subject the IRA to unrelated debt-financed income (UDFI). Unrelated business income tax (UBIT) is the tax associated with income earned by the percentage of the asset that is unpaid or still subject to the loan agreement.

How is UDFI calculated?

If your IRA borrows money to purchase a rental property, the percentage of debt compared to the value of the property is applied to the income generated by the property (after expenses are deducted) to determine how much of the income is taxable. The acquisition indebtedness is taxed because, without the loan, the IRA would not have been able to purchase the property.

For example:

UDFI

Your IRA purchases an apartment complex for $200,000 using a loan to pay 50% of the purchase price ($100,000.)

That means 50% of the net income is UDFI and will be subject to tax. The percentage of the property under indebtedness will determine the amount of net income received from the property that will be taxed until the loan is paid in full. See IRS publication 598 to read more about this topic.
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The IRA must file a tax return using an IRS Form 990-T to report the taxable income. The tax liability for the income is determined by trust tax rates.

Using a Non-Recourse Loan With Your SDIRA

Follow these steps to purchase real estate with a non-recourse loan.

START
STEP 1
Open a SDIRA

Open a SDIRA and fund it via a transfer, rollover, direct contribution, or a combination of these.

STEP 2
Choose the property you’d like to purchase
STEP 3
Research lenders that offer non-recourse loans

Keep in mind that different lenders may have different requirements.

STEP 4
Apply for the non-recourse loan
STEP 5
Obtain your non-recourse loan

Note that the borrower of the loan is your SDIRA, not you. Proper vesting on the loan documents is necessary. This usually takes about 4-6 weeks to process.

STEP 6
Direct Entrust to initiate the purchase
1. Submit your investment request online via the Entrust Client Portal
2. Submit a Real Estate Buy Direction Letter (paper form)
STEP 7
Entrust funds the earnest money deposit
STEP 8
Entrust funds the purchase

Once closing documents are executed, Entrust funds the purchase.

Close Escrow

List of Non-Recourse Loan Lenders

First Bank

First Bank offers non‐recourse loans to most of Colorado, the Phoenix metro area, southern California, and central California including Inland Empire and high desert areas. The maximum loan‐to‐value is 65%. Typical loan products are 15‐year fixed rate mortgages and 7/1 or 5/1 ARMs that can be amortized over 15 or 30 years with matching maturity. Generally, the bank completes transactions in 35 days for those with checkbook control or IRA owners signing on behalf of their plan or LLC. The loans do not have a minimum or maximum.

First National Bank of America

First National Bank of America offers loans for 1‐4 unit residential properties in 50 states. Loans for larger multifamily properties are available locally. The maximum loan term is 10 years with a max amortization of 20 years. First National Bank of America also offers rehab loans, refinancing, and will consider loans under $50,000. The typical processing time is 30 to 45 days from application to close.

First Western Federal Savings Bank

First Western Federal Savings Bank offers 25‐year, fully amortizing loans with no pre‐payment penalty and no balloon payments. The maximum LTV is up to 60% for 1‐4 unit residential properties and 50% for larger rental and commercial properties. The loan amount can range from $40,000 to $800,000. Typically, loan decisions are made within 2 days, and processing time is usually 30 to 35 days from the application date.

McGuire Capital Group

McGuire Capital Group has worked with borrowers and investors throughout Solano County and the surrounding area for over 30 years to offer fast, private financing to qualified clients. Must be non-owner occupied land, commercial or residential property. Loan amounts of $50,000 to $1,500,000.

North American Savings Bank

NASB offers an IRA lending program to help individual investors with their financing needs. NASB lends up to 70% loan‐to‐cost on single-family detached homes and 60% on all other residential properties (CA, AZ, FL, MI, OH, NV have a max 55% loan‐to-cost). The loan amount is determined by property condition, cash flow, recent property history, and retirement reserves in accounts. Loan decision are typically made within 24 hours. Processing time is about 45 days from application date. NASB offers a 5-year ARM and a 25-year fixed rate mortgage.

Pacific Crest Savings Bank

Pacific Crest Savings Banks offers non‐recourse loans to investment properties in Western Washington State held in self‐directed retirement plans such as Solo 401(k)s, IRAs, and more. Pacific Crest offers loans for purchase, rate and term refinance, and cash out refinance.

Solera National Bank

Solera National Bank offers financing for investments in single family homes, duplexes, condos or townhomes held in SDIRAs or Solo 401(k)s. Loan amounts range from $50,000 - $500,000 with a 65% maximum Loan to Value. Principal and interest monthly based on amortizations up to 25 years.

Minimum Requirements: The property must generate sufficient net operating income (rents minus operating expense) to exceed loan payment by at least 25%. Minimum cash reserves must be maintained in retirement account held at Solera National Bank.

Here’s a list of
non recourse lenders

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