Hard money is sourced from private individuals who wish to receive a high rate of return on their investment. Hard money loans are used by investors to purchase properties such as fixer-uppers that banks often won’t lend money on. Hard money loans are used by small business owners when they are unable to obtain regular bank financing.

The loans have strict restrictions and hefty interest rates of 12 percent or more, which can make it challenging to repay the debt. Because they have few restrictions, don’t demand excellent credit, and have a quick turnaround time, hard money loans are desirable for borrowers. They are also perfect for real estate speculators.

Here are the Terms for Hard Money

Hard money interest rates are the same for both residential and commercial loans and range from 12 to 18 percent or more. Although the loans have an amortization period of 15 to 30 years, there is typically a balloon payment after the first one or two years.

For instance, $599.55 would be the monthly payment on a $100,000 loan with a 30-year amortization period and a 6 percent interest rate. However, if the interest rate is increased to 15 percent, the increase in the monthly payment reaches $1,264.44.

Before signing the contract, small business owners must be certain they can afford the monthly payment. Prior to applying for a hard money loan, it is crucial to gather all the necessary data and you should be aware of the penalties if you fail to pay back the loan.

Here is What it Means to Default on a Hard Money Loan

In exchange for a hard money loan, the borrower is required to pay the hard money lender a monthly interest payment. The borrower will be in default if they don’t make those regular interest payments. In the world of hard money lending, the loan documents that are signed at closing contain detailed explanations of what is meant by a “default” condition.

Usually, a contract violation or nonpayment causes the default status to occur. A hard money loan would typically place you in default mode even if you miss just one interest payment or partially miss one payment in a month.

Penalties for Defaulting on a Hard Money Loan

1. Your Property Can Be Seized and Sold

The worst-case situation is that if you default on your hard money loan, the hard money lender has the right to seize and sell the collateral property, with the proceeds going toward paying down the principal amount of the loan and any unpaid interest.

2. You Will Suffer Monetary Penalty

Another implication of defaulting on your hard money loan is that you will have to pay more. This is because a good number of hard money lenders include a clause in the contract known as a “default rate” that states that once a borrower defaults in paying back the loan, they will be subjected to paying a higher interest rate.

3. It Will Have a Negative Impact on Your Credit Score

Defaulting on your hard money loan will no doubt have a negative impact on your credit score. Your credit score will drop if you default on a hard money loan; credit scores range from 300 to 850. The most affected groups will be those with high credit ratings, and they should prepare for a 100–150-point decline in their scores.

Due to a foreclosure, you may find it challenging to get fresh financing, acquire employment, or even rent an apartment or house if your credit score is low.

4. The Foreclosure Clause Will Be Activated

Please note that when a borrower doesn’t make payments on a loan, hard-money lenders take swift action to foreclose. Any portion of the debt that was repaid is forfeited because the full property was used as collateral. For instance, if a business owner returned $50,000 of a $65,000 loan, he would forfeit the full $50,000. When a borrower chooses to challenge the foreclosure in court, it can be a costly and drawn-out process for the lender.

5. Deed in Lieu of Foreclosure

When you default in paying your hard money loan, a deed in lieu of foreclosure, which enables the borrower to return the property and avert foreclosure, may be provided by hard-money lenders.  The benefit is that the business owner’s credit report and public records won’t show any foreclosures, which could have a negative impact on your ability to obtain future loans.

Owners of businesses must be certain that the lender will concur to sign a release of liens, otherwise, even though the property was returned to the lender, the borrower is still liable for repaying the loan.

How to Avoid Defaulting on a Hard Money Loan

It is not a good thing to default on a hard money loan and you can avoid defaulting on your hard money loan. First, it is advisable that the borrower does not over-leverage themselves and have a thought-out exit strategy from the hard money loan.

Either selling the property or refinancing into a conventional bank loan are the two most popular exit strategies. Be sure to tell your lender if you experience financial difficulties and are having issues making your monthly payments.

In Conclusion,

It is important that you take all reasonable steps to prevent delays by making on-time payments and maintaining current accounts. Corrective actions include making up missed payments and paying any fines that may be due. Typical clauses include a grace period of up to 30 days following a missed payment before the property goes into default.