Investment in real estate is one of the most promising options for plan owners of the Individual Self-Directed 401k or Roth sub account. The retirement plan promises wealth-building opportunities for participants as long as they follow the rules and regulations. In order to leverage purchase of a real estate property through the Solo 401k funds, a non-recourse loan is allowed.
About Non-Recourse Loan for Individual Self-Directed 401k
A trusted Solo 401k plan provider not only administers the establishment of this highly lucrative pension plan. They also provide guidelines for their participants in order to avoid prohibited transactions, particularly using a recourse loan for their real estate investment. According to the Individual 401 k law, a non-recourse loan is an allowed transaction to leverage a real estate investment.
Here are some of the must-know facts about the non-recourse loan:
- Non-recourse loan, unlike its recourse loan counterpart is not obtained and secured through the guarantee of the participant or individual.
- In order to secure a non-recourse loan, the collateral is required. In this case, the collateral is the real estate property to be purchased.
- The IRS does not categorize non-recourse loan as a prohibited transaction due to the fact that it is not guaranteed by the plan owner or individual.
- In general, there are more risks to the lender when it comes to non-recourse loan. Thus, it is less attractive to lenders compared to its more traditional recourse loan counterpart.
Processing a Non-Recourse Loan
The loan applicant must first submit his full application for the non-recourse loan. The process of approval for the loan includes fund verification and the appraisal of the property. After these two processes are done, the lender provides an interest rate quote. The calculation of the interest rate is based on the down payment provided and the type of property to be purchased.
The following documentations are required to expedite loan approval:
- Completed form of loan application.
- Copies of current detailed rent or signed leases. This document is not applicable for unoccupied properties as of loan application.
- Contract or purchase or sale with signatures of the administrator and account owner.
- Updated asset statement and verification of funds for the Self-Directed Solo 401k to be used for the property purchase and reservation.
It is imperative to note that recourse loans which are common in financial institutions and banks are considered prohibited transactions in the Individual Self-Directed 401k.
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