Hard money loans are an attractive option when going to a traditional banking institution won’t work. But lest you think hard money is an option of last resort, it’s not. Real estate investors rely on it all the time because it is fast and fairly easy to obtain. They just have to be aware of the consequences of going into default.
Just like traditional lenders, hard money lenders place liens on property in order to protect themselves. Actium Partners, a Salt Lake City, UT hard money provider, says that private lenders in their industry usually insist on being a lender in first position. Holding that first position gives them three options in the event of default.
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1. Extend an Opportunity to Cure
The first option is extending an opportunity to cure the loan. What does this mean? It means giving the borrower a certain amount of time to bring the loan current. But along with this opportunity generally comes a higher interest rate. A loan offered at 15% could easily jump to 30% in some states.
The opportunity to cure is more relevant when borrowers are making monthly installment payments. Yet at the same time, bringing a loan current with an interest rate that could potentially be twice as high may be impossible for the borrower. They may have no other choice but to allow the lender to proceed to the next step.
When a loan’s exit is structured as a lump sum payment, the curing option is much harder to make good on. Hard money lenders do not tend to wait too long in such cases. A 30-day extension to cure would be typical.
2. Repossess and Sell
Hard money loans are secured by collateral. When a loan is used to purchase real estate, the purchased property is often its own collateral. Otherwise, hard money lenders expect some other type of collateral more than capable of covering the value of the loan. The lender has every right to seize and sell collateral once a loan goes into default.
Despite being accused of predatory lending, Actium Partners insists that hard money lenders have no interest in being property owners or landlords. They also have no interest in seizing and selling properties. They would rather clients repay their loans according to written terms.
3. Obtaining the Property Deed
When real estate is the collateral on a hard money loan, lenders do not necessarily have to repossess. They can offer to bypass foreclosure in favor of what is known as a ‘deed in lieu of foreclosure’. Under such an arrangement, the borrower would simply turn over the deed of the property to the lender. The lender would take immediate possession and do with it as they see fit.
A deed in lieu of foreclosure benefits the lender by avoiding all the legal proceedings and administrative costs that accompany seizure and sale. It benefits the borrower by keeping a foreclosure off his record. The main downside is that turning over the deed to the property does not allow the borrower to collect any sale proceeds above and beyond what is necessary to repay the loan.
No loan is immune from default. Hard money lenders know this, which is why they go to great lengths to protect themselves. Their options are more limited due to the nature of their business. As such, they do not tend to be as lenient when borrowers default. They can’t be. The amount of risk they take on is too high to play games. Borrowers should understand that before signing on the dotted line.