No Personal Guarantees Allowed
Ideally a lender would like to have a personal guarantee in the event of default on a loan. However, in the case of an IRA obtaining a loan, the rules and regulations do not allow for this. Because of this fact, there are few lenders who offer true non-recourse loan programs for a Self Directed IRA. Those that do generally require a minimum down payment of 35%. This ensures that, in the case of default, the property can be sold and the loan paid in full.
Very Conservative Loan
Also, the IRA or business entity must have enough cash flow and/or reserves to make the loan payments, maintenance, insurance, dues and taxes. About 20% of the loan amount should remain in reserve, unless cash flow is more than adequate to cover expenses.
Current Guidelines Summarized
Please note that Safeguard Financial is not a lender.
Below are representative guidelines you may find as you search for non-recourse lenders. Each lender is a bit different, and guidelines change from time to time. Ultimately, each property is considered on a case-by-case basis.
a) Down payment: At least 30%. Condos as high as 50%.
b) Rates: 1.00% to 1.50% higher than normal non-owner occupied rates
c) Terms: 5/1 ARM & 25 year fixed
d) Reserves: 10-20% of the loan amount (depends on cash flow)
e) Timeframe: Approximately 4-6 weeks.
f) Property Types: Lenders favor newer properties. Fixer’s won’t qualify.
Initial Feedback
You will need to be prepared to provide the following information to a mortgage lender in order to get initial feedback on the property:
- Type of property
- Purchase price
- Address
- IRA liquid balance
- Has the property sold in the last 3 years? If so, for how much?
- Square footage
- Approximate rental income the property can generate
- Taxes, insurance, and HOA dues
- Picture or listing of the property
A WORD OF CAUTION: Do not wait until you have found a property to purchase before setting up a Self Directed IRA plan. You will be greatly disappointed to discover that you’re likely to lose the property due to timing.
