PURPOSE: The MR properties (chemical shifts and R2∗ decay rates) of dissolved-phase hyperpolarized (HP) 129 Xe are confounded by the large magnetic field inhomogeneity present in the lung. This work improves measurements of these properties using a model-based image reconstruction to characterize the R2∗ decay rates of dissolved-phase HP 129 Xe in healthy subjects and patients with idiopathic pulmonary fibrosis (IPF). METHODS: Whole-lung MRS and 3D radial MRI with four gradient echoes were performed after inhalation of HP 129 Xe in healthy subjects and patients with IPF. A model-based image reconstruction formulated as a regularized optimization problem was solved iteratively to measure regional signal intensity in the gas, barrier, and red blood cell (RBC) compartments, while simultaneously measuring their chemical shifts and R2∗ decay rates. RESULTS: The estimation of spectral properties reduced artifacts in images of HP 129 Xe in the gas, barrier, and RBC compartments and improved image SNR by over 20%. R2∗ decay rates of the RBC and barrier compartments were lower in patients with IPF compared to healthy subjects (P < 0.001 and P = 0.005, respectively) and correlated to DLCO (R = 0.71 and 0.64, respectively). Chemical shift of the RBC component measured with whole-lung spectroscopy was significantly different between IPF and normal subjects (P = 0.022). CONCLUSION: Estimates for R2∗ in both barrier and RBC dissolved-phase HP 129 Xe compartments using a regional signal model improved image quality for dissolved-phase images and provided additional biomarkers of lung injury in IPF.