Defaulting On A Hard Money Loan?

A hard money loan can be the best way to start investing in property. A hard money loan is backed with the value of the investment property — and it’s often used by house flippers, wholesalers, and more. 

But what happens if you default on a hard money loan?

How Long Do You Have to Pay Back a Hard Money Loan?

A hard money loan is usually short-term. It’s anywhere from 12 months to 3 years. A hard money loan can even be just a few months if you’re looking for a hard money bridge loan.

So, you need to keep current on the loan. Hard money loans are popular with house flippers. You just hold the property for a few months and you pay off the entire loan when you flip the property.

But you can get in trouble. Let’s say your flip takes longer than you thought it would and now you’re behind on your loan. The next part of the process is the same as any other loan: default. In this case, it’s essentially the process of foreclosure. With a hard money loan, it just happens much faster and has more significant consequences.

What Happens When You Default on a Hard Money Loan?

When you default, you fall into foreclosure. That’s the same as if you stopped paying your mortgage loan. A lot of people don’t realize how quickly a mortgage company can move to foreclose on a property. It’s a matter of a few months.

Your hard money loan, when in default, will cause the lender to reclaim the property. The property will become theirs and they will sell it. Now, there’s a difference here between a regular loan and a hard money loan.

Let’s say you bought a $150,000 property, paid $50,000, and then defaulted. A bank would sell the $150,000 property, deduct $25,000 in legal fees, and you would get $25,000 back. You would get the difference.

A hard money property doesn’t give you back the difference. You’re out the $50,000 you paid. And that’s because hard money lending is very high risk. The lenders need to recapture their costs. 

That being said, it doesn’t become an issue if you don’t default on the loan. Often, a hard money lender will be willing to work with you. But you need to communicate with them; you have to tell them that you’re going to be late on the loan and that you need an extension. If they don’t hear from you, they will simply start the process of foreclosure.

So, it’s not a great idea to default on a hard money loan. But that doesn’t make a hard money loan a bad idea; it’s often the best way to fund a short-term investment. Sometimes it’s the only way. To learn more, read more from the experts at Hard Money Lenders AZ.