Before looking at the main differences between an IRA loan and a regular mortgage loan, it is important to understand exactly what these two terms mean: Mortgage loan: A mortgage loan is also known as a recourse loan, it is the lender who holds the power.
If you default on your loan and the collateral is not resold to cover the amount of the money you borrowed then the lender can pursue you until you have paid back the full loan amount plus penalties and interest.
For this they can file a lawsuit against you, take your wages or potentially seize any personal assets with a court order.
IRA loans: In the case of an IRA loan, or non recourse loan, if you were to default on your loan then the lender does not have any other collateral or assets to claim other than the real estate; for example, a piece of property.
Even if this does not add up to the amount of the loan, the lender cannot take any further action against you or your IRA to recoup any losses they incur.
Personal liability The main difference between an IRA loan and a regular loan is that you are not viewed as personally liable should you default on the money you borrowed.
You simply lose the property on which you took the loan and any down payment made at the time of purchase.
Even if the cost of the property is less than the amount of money you borrowed, your lender cannot not take any further money or assets from you or your IRA.
This is the main benefit of a non recourse IRA loan over a regular mortgage loan.
Costs Due to the fact that the lender has a reduced guarantee in retrieving all the money loaned, the risk is much higher for them; any money lost becomes their issue and not yours as the IRA holder.
There is no other way for the lender to be repaid in the event of a loan default other than to foreclose on the property pledged as security for the loan repayment.
In general, if a loan has collateral (such as other assets aside from the real estate) then the loan costs are usually less.
However, in the case of a non recourse loan, they often require a higher down payment to lower the risk for the IRA lender.
Interest rates As it is harder to get a non recourse loan, a normal compromise is that the interest rate you are subjected to is higher than with a regular mortgage.
However, there are ways in which you can reduce these costs.
For example, with a real estate IRA you can provide a larger down payment of 30 - 50%, depending on the transaction.
Alternatively, a second route is to pay more back each month thereby giving the IRA lender the security of a shorter period in which you will have the loan.
Taxes There are two different income taxes potentially associated with an IRA loan.
They are: 1.
Unrelated Business Income Tax (UBIT) and 2.
Unrelated Debt Financed Income Tax (UDFI).
Because these two types of income taxes may come into play when leveraging real estate held in your self-directed IRA, it is best to consult with a CPA or tax accountant with any questions.
Although loans with personal guarantees are seen as the cheaper and easier financing option, an IRA loan procured through a non recourse lender allows you flexibility to invest your retirement funds in real estate without needing as high of an IRA balance to purchase the property.