Can an ira make a mortgage loan?

Your IRA can issue a guaranteed or unsecured promissory note. With a guaranteed real estate note, you'll also create a mortgage or deed of trust. You'll draft the promissory note and the borrower will sign it, along with any related loan documents. The IRS rules prohibit any benefit benefit from you or a disqualified party from the plan.

This prevents you from placing a personal security on any debt instrument, such as a mortgage. As such, an IRA or 401k must obtain a no-recourse mortgage. In this type of loan, you are not using your credit to qualify and you are not pledging your personal assets as collateral for the loan in the event of a default. Rather, the plan is the borrower and the property may be the only security of the loan.

Basically, the property qualifies for the loan. The loan is for the IRA, not for the individual owner of the IRA, and is secured by collateral, usually real estate. The loan is based on the value of the real estate investment and, in general, the credit of the IRA holder does not come into play for the IRA to qualify in most cases. When you have a small IRA or simply don't have enough funds to invest in real estate, your IRA can get you a no-recourse mortgage loan.

An important reason why retirement account investors don't usually borrow money (also called debt or leverage) as part of a real estate investment or acquisition is that section 4975 of the Internal Revenue Code prohibits an IRA holder (you) from personally securing a self-directed IRA loan. While the leverage of an investment in an IRA generates administrative expenses and the costs of filing the UDFI, the final outcome of your IRA can still be very favorable.

Christine Raiford
Christine Raiford

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