What Happens If You Default on a Hard Money Loan?
Taking out a hard money loan is a significant commitment that requires careful planning and financial responsibility. They’re typically short-term and high-interest, secured by real estate, and often used for investment purposes or unconventional properties. That said, while hard money loans are quick and convenient, defaulting on them leads to severe consequences. Today, we’re going over what it means to default on a hard money loan, potential consequences, and tips for avoiding defaulting. Read along to learn more.
Contents of This Article:
- What Does It Mean to Default on a Hard Money Loan?
- Why Do People Default on Their Loans?
- Consequences of Defaulting on a Hard Money Loan
- How to Avoid Defaulting on a Hard Money Loan
- Looking for the Right Lender for Your Investment?
What Does It Mean to Default on a Hard Money Loan?
When you default on a hard money loan, it means that you failed to meet the loan terms, typically by missing a scheduled payment. However, defaulting could also mean that you missed interest payments, failed to repay the loan in full by the end of the term, or violated other hard money loan requirements.
Defaulting on a hard money loan, or any loan for that matter, is not good. If you fail to pay what you owe, your lender will likely initiate foreclosure on the property to recover their investment. Knowing what happens when you default on a hard money loan is crucial. So, read along as we discuss why people may default and some of the consequences they’ll face if they do.
Why Do People Default on Their Loans?
People may default on a hard money loan for several reasons. Whether they’re going through personal or financial struggles or they have a lack of savings, missed payments can happen for many reasons. Here are some of the most common.
- Financial Struggles- Some people run into financial struggles. Whether you lose their jobs or have to pay for a medical emergency, it can become impossible to meet loan payments.
- Poor Planning- If you take out a hard money loan, it’s essential to have a solid plan to repay it. If you misjudge your monthly income or don’t have a good emergency fund, it can make it more difficult to repay your loan.
- Bad Loan Terms- Every lender is different when it comes to loan terms. Some charge higher interest rates or require larger down payments than others. If you choose a loan with a high interest rate or short repayment periods, it can quickly become unaffordable.
Other factors that can cause someone to default on their loan may include economic downturns, personal challenges, or overestimating the potential returns on an investment.
Consequences of Defaulting on a Hard Money Loan
Defaulting on a hard money loan can have serious consequences. After all, your real estate investment is collateral for the loan, so you risk losing it. Here are some of the things that may happen if you default on a hard money loan.
- Foreclosure
- Loss of Money
- Legal Action
- Damage to Credit Score
- Increased Borrowing Costs
Foreclosure
Since hard money loans are secured by real estate, your lender will likely initiate foreclosure if you cannot repay the loan. This means they take ownership of the property and sell it to recover their investment. Unfortunately, you’ll lose ownership of the property and any money you’ve put into it.
Loss of Money
If the property gets sold in foreclosure, you can lose all the money you put into the loan already. For instance, you lose your down payment, renovation costs or improvements you’ve made to the property, and any additional fees you may have paid. As you can imagine, this can be devastating, especially if you were counting on making income from the property.
Legal Action
If you default on a hard money loan, your lender has the right to take legal action to recover the outstanding debt. For instance, if the foreclosure sale doesn’t cover the whole loan balance, your lender can sue you for the remaining amount.
Damage to Credit Score
While hard money loans don’t rely heavily on your credit score, defaulting on them can still impact it. For instance, if your lender forecloses on the property, your score will likely drop significantly. This can impact your ability to get future loans or lines of credit.
Increased Borrowing Costs
If you default on a loan, it signals a higher risk to lenders. This means that if you want to take out another loan, you’ll face higher interest rates and stricter loan terms. For instance, they may require a larger down payment or shorter repayment terms. Clearly, this makes borrowing more expensive and limits your financial flexibility.
How to Avoid Defaulting on a Hard Money Loan
Nobody wants to default on their hard money loan. However, sticky situations can pop up for anybody. Here are a few tips that can help you avoid defaulting on your loan.
- Create a Realistic Repayment Plan- Having a realistic plan for repaying your loan is important. Whether you sell the property, refinance the loan at the end of the term, or plan on using the property to make rental income, knowing how you’ll repay the loan is a crucial part of the process.
- Communicate With Your Lender- If you think you may have difficulty repaying your loan, contact your lender immediately. Having a good relationship and open communication with your lender is important. Most lenders will work with you to restructure payments to avoid default.
- Build a Large Financial Cushion- To avoid missing payments on your loan, set aside extra funds to cover unexpected expenses. There’s always a chance you miscalculate property repairs, and it’s hard to control delays in selling.
- Monitor Your Project Closely- If you’re working on a real estate project, it’s important that it stays on schedule and within the budget you set. Monitoring this can help address any potential issues before they lead to financial trouble.
Looking for the Right Lender for Your Investment?
The last thing you want to do is default on a hard money loan. It can cause you to lose your investment, endure hefty fees, and potentially lead to legal trouble. That said, finding the right loan for your investment can help you avoid missing payments.
If you’re looking for a hard money loan near Baltimore, look no further than Maryland Hard Money Lenders! Our team of real estate loan experts can help you find the right financing for your next project. Contact us to learn more about our lending process, or start our initial loan application today.
