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Did you know that more than 20 million Americans have taken out personal loans? Other Americans are taking out hard money loans from private individuals instead of going through the traditional process of taking out a personal loan. If you are trying to figure out what happens if you default on a hard money loan, we are here to help you out.
This Is What Happens if You Default
Keep reading our guide about defaulting on hard money loans.
The best way to avoid defaulting on hard money loans is to understand how they work. Hard money lenders will use an entire property as loan collateral. They will usually cover 60-70% of the property’s current market value or its after repair value, this will depend on the lender.
An example of this is if a business owner decides to buy a property that is selling at $80,000 and it has an after repair value of $100,000 then the hard money loan will cover up to 70% of the $100,000 after-repair value. The borrower would then be responsible for coming up with the remaining money (which in this example would be $10,000).
Defaulting on the Loan
There is usually a default interest rate clause in the contract. Hard money lenders will raise the interest even higher in the event that you do default. The rate might skyrocket and even double in some cases. This can make it impossible to pay the loan off because the payments will also double.
In the contract, you might have a cure clause which will allow you to bring the loan current before having the interest skyrocket. Make sure to read over your contract carefully because usually, this is a very short period of time you have. If you allow the loan to remain in default for too long the lender will move on to the next step as soon as possible.
Deed in Lieu of Foreclosure
There are some lenders that will give you this offer instead of foreclosing. This means that you can give the property back to the lender and not have to worry about the stress that comes with foreclosing.
This will also keep you from having a foreclosure appear on your credit report or on the business owner’s credit report. Any type of foreclosure will negatively affect the ability to get any future loans.
Always triple-check the contract to make sure that the hard-money lender agrees to sign a release of lien if you give the property back. If they do not agree then you will still be responsible for paying back the loan even if you give the property back.
Soft money lenders and hard money lenders have to play by the same foreclosure laws in that state. If your state has a law that requires a lender to go to court in order to foreclose a property then your lender will have to first notify you that you are in default. Once they notify you then they are allowed to file a foreclosure suit.
Once the suit is filed then they have to also notify you of this. After this initial suit, there will be a judicial hearing where they will decide if they can take your house or not.
Keep in mind that the judicial hearing might take longer than a year in some states.
If you default and your hard-money lender sells off your property in a foreclosure it will lower your credit score between 85 to 160 points. The number of points is determined by the strength of the rest of your finances.
If you originally took out the hard money loan because your credit score was too low for a soft money loan, then if you default it will make things worst for your credit score.
Depending on where you live, your lender might have the right to sue you for any part of the mortgage that was not covered by the foreclosure sale. With this in mind, you want to think twice before agreeing to a hard-money loan.
With a hard-money loan, you might find different stipulations that you will not find with a regular lender or bank loan. In some circumstances, the lender might require the property value to not go below a certain level. If the value does go below the level they have in the contract then it gives them grounds to foreclose on the property and sell it off before it goes even lower.
In other situations, the lender might require you to maintain the property a certain way. If you do not follow these guidelines and requirements, they might have the right to foreclose.
If you have a loan on a commercial property and you want to add a junior lien, you might have to get permission in writing before doing so.
Now You Know What Happens If You Default on a Hard Money Loan
As you can see there are consequences when you default on a hard money loan. The answer to what happens if you default on a hard money loan is not the answer that most people want to hear. The best thing to do is to pay off your loan on time and do not take one out if you feel that at any point you might get into financial stress.
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