What Happens If You Default On A Hard Money Loan

Hard money loans are a real estate loan that comes from private financial lenders. So the process can be slightly different than getting a real estate loan from a bank or credit union. One of the questions our hard money loan experts get asked all the time is what happens if you default on a hard money loan?

If you are thinking about applying for a private real estate loan you may be concerned about what that means if you default on the loan or the contract is broken. But don’t you worry! Hard Money Property is here to answer all of your questions! There are a few things you must understand to have a complete understanding of working with hard money lenders.

defaulting on a private real estate loan

What Is The Structure of The Hard Money Loan?

Hard money loans are much more flexible than traditional bank loans which means that they are able to have a variety of different loans structures. The loan structure can vary depending on if it is a fix and flip loan, a bridge loan, or any other type of loan. Since the loan is based off the value of the property, the loan-to-value (LTV) ratio is important for configuring the loan structure. 

The strucutre will typically encompass a short-term structure as this is most common with hard money loans. The term is typically in the 6 months to 24 month range, with an average interest rate in between 9%-12%. But there can be other variables such as upfront fees, point differences, and other variables that can come into play with the structure of the loan. All of these variables can alter what happens if a loan is defaulted on.

What Happens If You Default On A Hard Money Loan?

If you have hit hard times and are worried about defaulting or foreclosing on your hard money loan than it is important to understanding the repercussions. Since loans such as commercial loans, mobile home loans, and other hard money loans are asset based loans, it means that the property will serve as a term of collateral for the loan period. The contract you sign should give you guidance on what will happen if you have payments that are late, or if you do end up defaulting on the loan in its entirety.

If you end up defulating on your loan then you will be required to work with the lender to allow them to foreclose on the property. This could require you signing a Deed of Trust, a Promissory Note, or even going to a courtroom depending on the location.

It is important to understand that hard money lenders are hoping that you succeed with your project because they see each customer as the opportunity for repeat business. Our network of real estate lenders have worked with some customers for over 20 years! So they don’t want to see any of their customers fail. The entire foreclosure process is strenuous and isn’t an ideal situation for either party. We believe it is incredibly important to communicate with your lender to see what your options are as well as to give them a heads up on the situation. If you treat them with respect and give them notice as early as possible, they may be able to work with you as much as possible.

We hope we have been able to help you have a better understanding of what will happen if you default on a hard money loan. If you would like to read similar hard money content, then please check out our blog posts.

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