How does a non-recourse loan work?

[David B.]

How does a non-recourse loan work with an IRA or Solo 401K? I understand that the bank requires a larger down payment than for a normal mortgage because they can't recover money from the IRA in the event of a foreclosure.

But I don't see how that protects the bank. Say my IRA puts $40K down and the bank $60K on a $100K property. What happens if I default on the loan, and the bank is stuck with the property? Since they can't keep the IRA money, would they have to refund that $40k to my IRA? That would mean they are into the house for a total of $100k, defeating the purpose of me (the IRA) putting any money down at all.

I'm sure I'm missing something obvious.

David

[Bryan Hancock]

I think you're confusing where the $40k goes. The bank is only lending $60k in the example above. The balance between the lesser of the appraised value or the purchase price is the bank's cushion if the event you default. There would be no "refund" of the $40k in your scenario. The money would be at risk and the lender would have access to the collateral (the property) without the opportunity to go after some deficiency judgement for the balance if the language in the loan and your actions are normal for a non-recourse note.

Note that you have to have a non-recourse note to do what you're trying to do because a personal guarantee would be considered an outside benefit to your SDIRA. This topic has been discussed 100 or more times on BP. Try doing some searches and digging up some of those threads. The general consensus is that this is a poor use of SDIRA funds relative to other options.