Holding Promissory Notes, Deed Trusts & Mortgage Notes in an IRA
A self-directed IRA may loan money to another IRA as an investment. The loan is documented by providing written loan documents, such as a promissory note. A Promissory Note may be written by either the lender, the borrower, or a third party and represents a promise to repay a borrowed sum of money.
A promissory note may indicate, for example, the amount owed, interest rate terms, monthly payment amount, and maturity date of the loan. Think of a promissory note as simply a legal obligation between your IRA and the borrower.
There are two types of Promissory Notes:
This type of promissory note is backed by collateral. In the event the borrower does not pay back the loan, the lender receives the collateral in lieu of payment.
This type of promissory note is not backed by collateral. In the event of default, the lender has no recourse but to take legal action against the borrower.
Once the terms of the promissory note are put into place and the borrower has signed the note, IRA Services can be instructed to send funds to the borrower. A secured promissory note may require additional documents.
Deed Trusts & Mortgage Notes
If the borrower is purchasing real estate, the loan will include a deed of trust securing the loan. As a self-directed IRA investor, securing a loan protects your investment against default. In certain cases where a borrower has defaulted on a promissory note, a deed of trust allows the IRA to force the sale of property in order to satisfy the amount owed.
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