What Happens if You Default on a Hard Money Loan

By Russell Barneson

What Happens if You Default on a Hard Money Loan

By Russell Barneson

Hard Money Loans: Why People Default and What You Can Do to Avoid It

Hard money loans are a source of short-term financing frequently used by real estate investors to secure a loan for a property that a bank or institutional lender would typically avoid, such as a fix and flip house or a distressed property.

Hard money loans are appealing to borrowers because they have few requirements, don't require a great credit and the fast turnaround time makes them ideal for many real estate investors.

Before you obtain a hard money loan, though, be aware of the consequences if you default.

What Does it Mean to Default on a Hard Money Loan?

When a borrower takes on a hard money loan they have an obligation to make monthly interest payments to the hard money lender.

If the borrower fails to make those required monthly interest payments, he or she is in default. 

The specifics of what constitutes "default" condition are specified in the loan papers signed at closing in the hard money lending industry. The default status is usually triggered by a breach of contract or lack of payment.

Usually even missing only one months interest payment or partially missing one months payment will put the borrower in default.

Consequences of Defaulting on a Hard Money Loan?

The hard money loan documents go into detail about how to handle a default situation and bring an outstanding loan current.

Avoid delays by paying on time and keeping your accounts current. Corrective measures include catching up on missed payments and any applicable fines.

If a payment is missed, typical terms include having up to 30 days to make up the deficit before the property enters default.

However once this threshold is crossed the following is likely to happen;

Property Seized and Sold?

In the worst-case scenario, if you default on your hard money loan, the hard money lender has the right to seize and sell the collateral property, using the proceeds to pay off the outstanding loan and any unpaid interest. 

Monetary Penalty 

Most hard money lenders have what is called a “default rate” written into the contract stating once a borrower is in default they must now pay a higher interest rate.

Negative Impact on Credit Score

Credit scores range from 300 to 850 and when you default on a hard money loan, your credit score will suffer.

People with high credit scores will be negatively impacted the most and should anticipate their credit score dropping anywhere from 100 to 150 points. 

If you have a low credit score as a result of a foreclosure, it might be tough to obtain new financing, find work, or even rent an apartment or home.

What Happens to My Equity in the Event of Foreclosure?

By law, a lender may not keep any money beyond the amount owed after a property sale.

After all liens are paid in a foreclosure, the borrower will retain any remaining equity.

Borrowers will be responsible for making the lender whole on the principal loan amount and also on any accrued interest during the foreclosure process.

Since foreclosure properties are sold at auction, they usually sell for less than market value, which is not great for the borrower.

Judicial vs. Non-Judicial Foreclosure

Depending on where your collateral property is located, the procedure used to repossess it will differ.

A judicial foreclosure requires the lender to go to court to obtain a judgment to foreclose on your home, while a non-judicial foreclosure does not require the lender to appear in court.

The judicial foreclosure process can take years while the non-judicial foreclosure process usually takes a few months.

The following states use non-judicial foreclosure: Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Georgia, Idaho, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, and Wyoming.

How to Avoid Defaulting on a Hard Money Loan

It’s imperative for the borrower to not over leverage themselves and to have a thought out exit strategy from the hard money loan.

The most common exit strategies are either selling the property or refinancing into a traditional bank loan.

If you run into financial trouble and are having trouble making the monthly payments be sure to communicate with your lender. 

Usually a smaller local hard money lending company will be understanding and more willing to work with you on a modified payment structure than a large nationwide lender.

Many of these nationwide lending companies package hard money loans together and sell them to private equity companies who are not concerned with your financial wellbeing.

How Often Does Crescent Lenders Foreclose on Borrowers?

We have an open line of communication with our clients at Crescent Lenders to assist them in difficult situations.

Our small company structure allows us to be flexible with our borrowers meaning oftentimes we can accommodate them with favorable payment structuring.

Over the last decade we have funded hundreds of hard money loans and have only had a handful of foreclosures because we lend money to individuals whom we believe are in a position to pay us back.

If you are in need of a hard money loan don’t hesitate to contact us. 

Hi, I'm Russ and I'm determined to help real estate investors achieve their goals.
If you need help obtaining financing in a rapid fashion give me a call at 213-474-3131.

Related Posts

The Top 4 Most Common Hard Money Loan Scams and How to Avoid Them

  • California
  • Los Angeles
  • San Diego
  • San Francisco

Disclaimer: Crescent Lenders, DBA CrescentLenders.com ("CL") is a California licensed broker under California Bureau of Real Estate License No. #01792267. Regardless of this license, CL considers itself a “finder” for purposes of applicable laws and regulations (California Business & Professions Code § 10130, et. seq.).

Crescent Lenders, 2999 Overland Ave, Suite 116, Los Angeles, California, 90064