A hard money loan is a type of loan financing in which the borrower uses real property (i.e., their home) as collateral to secure the funds. The interest rate is usually higher than conventional loans or mortgages because the risk of default is higher and the loan term is much shorter. Defaulting on a hard money loan is costly and the consequences can financially ruin the debtor.
Borrowers go the route of a hard money lender without having any prior knowledge about what repercussions await them in case of default. This casual approach could be very dangerous. Just to be on the safe side, you should know what consequences you will have to go through as a hard money loan defaulter.
1. Loss of asset
The moment you sign a hard money loan, the lender is entitled to foreclose the property in case of default. Putting your asset at stake indicates the risk involved in the process of this type of loan. The borrower should be prepared to walk away from their property if they plan to default on a hard money loan.
Your house is put to auction, 110 days after the lender sends you a default notice. If you manage to clear the installments five days before the sale, the house shall be saved. Otherwise, the lender will have the right to sell your house and clear his payments.
Hard money lenders are not as understanding as conventional lenders. You will have difficulty to convey them your financial crisis and hard times being visited upon you. They lack a sympathetic ear for all this. While banks will help you to restore the mortgage, hard money lenders will deny any such luxury leaving you in complete disarray. So don’t be surprised if they rush through the things and act aggressively just to get their money back at the earliest.
2. Credit score takes a hit
Your woes will not come to a close with the foreclosure. You are well and truly in place to face more problems in the future. The biggest problem foreclosure can pose to you is loss of credit score. You can lose between 85 to 160 points depending on the state of default. Keep in mind each state is its own jurisdiction and therefore they have their own laws.
Getting approved for a loan with poor credit score will be tough, not impossible, but improbable. By a stroke of luck, if you manage to break through a loan program, you are sure to pay more interest than people with a good credit score. This is just one side effect of poor credit score; there will be numerous likewise problems waiting to raise their ugly head. A list of such possible troubles is given below:
- You can be denied certain jobs. Like the elite jobs in the finance industry which require good credit history. According to the finding of a think tank, one job applicant among seven was denied a job due to poor credit score. So it is not an unusual practice for companies to have an in-depth look at your credit score before handing you a job
- Higher insurance premiums will be well on their way. Because insurance companies link low credit scores with high claims. According to NAIC, 85 percent of the homeowner insurers include the factor of credit score in the states which allow them to do so
- Could be difficult to purchase a new car and starting a new business because lenders will have an in-depth look at your credit score
- A cell phone is pretty much everything these days. If your credit score is on the lower side, the odds are that cell phone carriers will be slightly skeptic to sign a contract with you. Low credit score will make you a risky customer. As a result, more often than not, the cell phone plans will be either costly or inconvenient for your liking
- Could be tougher to find a house on rent because someone with less credit score will have a hard time to pay for the rent on time. At the same time, it also depends on the area where you are renting a house
Now, imagine how many problems you are inviting with a single misfortune called default?
3. Loss of down payment
According to the general proceedings, 30 to 40 percent amount is given to the lender as a down payment. Having down payment in the pocket, lenders have hardly anything to lose by foreclosure. It is the house owner who has to face the music. The point being, even if your property values more, hard money lenders will sell it for the amount just about enough to clear their debts.
Let’s take an example to illustrate things more clearly. If you have given away 40 percent money as a down payment, now in the situation of a hard money loan default, the lender has to recover only 60 percent amount so he will sell the property for 60 percent of its total cost. That way, you are denied the down payment.
Unlike banks, hard money lenders will not give you breathing space. As mentioned above, they will rather capitalize on your murky financial standing so that they can have their money as soon as possible.
What’s worse, default could also give way to the lawsuit as well. This is known as a judicial foreclosure. Things could be a little trickier with judicial foreclosures. While non-judicial foreclosures can be wrapped up in the matter of a week or two, judicial foreclosures can take as much as one year. You are expected to give away a considerable fortune in the court proceedings. How about that for rubbing salt on your wounds?
Although judicial foreclosures are very rare and restricted to only a few states. However, if your state allows this, then the lender will be obliged to pursue you in court. These clauses are typically mentioned in the loan terms, but they are so obscure that 6 out of 10 homeowners wish they understood terms better.
The law has it, for example, if the borrower owes $300,000 to the lender and the value of the property is $200,000, then the court can give the verdict in favor of your lender. This means you will have to pay the remaining $100,000 even after your house no more belongs to you.
Do not default on a hard money loan!
By now, it’s obvious that defaulting on a hard money loan should be avoided whenever possible. Without any exaggeration, a single instance of default can turn your life 180-degree upside down because it sticks with you for many years. So before giving a call to the next door hard money lender, carefully look into these cons as well. Otherwise, you will be landing yourself in a big danger.