DEFAULTING ON A HARD MONEY LOAN

The source of hard money is private individuals who want high interest returns on their cash loans. Investors utilize these loans to purchase properties that banks do not normally offer loans on. The loans often carry interest rates in excess of twelve percent, however.

Loan Structure

The entire property is used by hard money lenders as collateral. Usually only sixty to seventy perent of the after rapair value of the property us covered by the hard money loan. The borrower would come up with the balance.

Terms

With interest rates ranging from twelve to eighteen percent, these loans are high interest but over fifteen to thirty years still have a baloon paument usually after the first or second year. At just 6 percent interest the montly payment over 30 years on a $100k loan is just $599.55 but trade that for a an interest rate of fifteen percent andit cleaps to $1,264,44. You can also expect  to pay between two and four points on the loan as well.

Default

Hard-money loan contracts typically contain a default interest rate clause that significantly raises the interest rate in case of default. For example, the rate may jump from 15 percent to 29 percent in some states, sending the monthly payment from $1,264.44 to $2,417.11, which could make it impossible for a small-business owner to cure the deficiency.

Foreclosure

Hard-money lenders are quick to foreclose when the borrower fails to cure the loan. Since the entire property was used as collateral, any portion of the loan amount that was paid back is forfeit. For example, if a business owner paid back $50,000 of a $65,000 loan, he lost the entire $50,000 paid.

Deed In Lieu

Hard-money lenders can offer a deed in lieu of foreclosure, which allows the borrower to give back the property and avoid foreclosure. The advantage is that no foreclosure appears on the business owner’s credit report or in the public records that would negatively affect her ability to get future loans. Business owners must be sure the lender will agree to sign a release of lien at the same time. Otherwise, the borrower remains responsible for paying back the loan even though the property was given back to the lender.

Source: https://smallbusiness.chron.com/happens-default-hardmoney-loan-61461.html