What Happens When You Default on a Hard Money Loan?

what happens when you default on a hard money loan

Borrowers use hard money loans to finance certain types of commercial real estate, but the high interest rates and shorter loan terms create substantial risk.

When you default on a hard money loan, you’ll have a short amount of time to bring the loan current while dealing with financial penalties such as late fees and/or default rates. Unless you quickly bring the loan current or negotiate new loan terms with the lender, the property will enter foreclosure.

Let’s explain what happens when you default on a hard money loan, and what you should do if it happens.

What Does it Mean to Default On a Hard Money Loan?

Many people think that a default occurs when the borrower stops making payments on a loan, but what a default really means is that the borrower has failed to comply with the Deed of Trust.

There are monetary and non-monetary defaults:

  • Monetary Default: Lenders can trigger monetary default when the borrower misses payments, doesn’t make the balloon payment at the end of a loan, stops paying property taxes or insurance, etc.
  • Non-monetary Default: Lenders can trigger non-monetary default when a borrower fails to comply with certain loan conditions, such as compliance with local laws or not maintaining the stipulated debt-to-income ratio.

In most places, the borrower will be given a grace period to bring the loan current or comply with loan conditions before the lender can issue a notice of default, but every loan may set different conditions on grace periods and the process / timeframe in which lenders can issue a NOD. Furthermore, regulatory laws vary by state.

Is Default the Same as Foreclosure?

Default is not the same as foreclosure.

When a lender issues a Notice of Default, the borrower may have a short amount of time to pay missed installments or comply with the loan terms—but it’s entirely dependent on the loan terms and local laws.

In some cases, the lender may be able to pursue foreclosure immediately following a single missed payment. In most cases, the lender chooses to resolve the situation with the borrower and only pursues a foreclosure strategy if the borrower cannot or will not bring the loan current.

What Happens On a Hard Money Loan Default

Borrowers face three challenges when they default on a hard money loan:

  • Penalties: The borrower might have to pay late fees on each of the missed payments, and the loan rate may increase significantly—which can be extremely burdensome because hard money loans already have high interest rates. The default rate and late fees are typically spelled out in the loan terms.
  • Bringing the Loan Current: Borrowers can either pay the missed installments in a lump sum, or make higher monthly payments until the loan is remedied (again, it depends on the loan terms). Sometimes borrowers refinance the loan, if allowed by the loan terms.
  • Forbearance / Loan Modification: If a borrower is having difficulty paying the loan installments, they might be able to renegotiate the loan terms with the lender to make the payments more manageable, or sign a forbearance agreement.

Borrowers often default because they’re in financial distress, so late fees, default rates, and higher loan payments make it even more difficult for them to bring the loan current. Foreclosure is a real possibility if the borrower can’t find a way to remedy the loan.

TLS Can Help Borrowers that Default

Borrowers should know that most lenders want to avoid foreclosure at all costs because it’s risky and time-consuming. Instead, they’ll often enlist a foreclosure firm, like Total Lender Solutions, to resolve the default.

The foreclosure firm will reach out to you and propose one or more solutions to avoid foreclosure. These solutions might include:

You stand to benefit from being cooperative with a foreclosure firm.

Ideally, you’d be able to find some way to bring the loan current and keep your equity in the property. However, if the loan has become unmanageable then it’s best to consider a short sale, deed in lieu of foreclosure, and other non-foreclosure resolutions that are on the table. While these options can be difficult to stomach, they can cause you less financial harm than an outright foreclosure.

If you’ve defaulted on a hard money loan and are facing foreclosure, don’t hesitate to work with TLS if we reach out to you—or you can reach out to us first for guidance and educational resources.