Hard Money Loans: Effects of Defaulting

Hard money loans have been known as a loan of last resort for borrowers in financial distress. A typical hard money borrower cannot qualify for a conventional loan from a traditional financial institution such as a bank or other commercial lender. In many cases hard money loans are taken out by an individual or business who cannot qualify for any other loan type. Hard money loans are acquired by those already in considerable financial difficulty, by those who need an infusion of money quickly in order to stave off foreclosure proceedings, to avoid bankruptcy, or to resolve an arrears situation with their mortgage holder.

Hard Money Loans:  Effects of Defaulting

While hard money loans can rectify an immediate financial crisis, this relief is often temporary. Over the not-so-long term they can put the borrower in worse shape than before by introducing him to a crushing cycle of debt.

Hard money loans are expensive. The interest rate is higher and there are customarily upfront fees or "closing costs" attached as well. When all is said and done, the borrower may be left with a monthly repayment burden under which they will quickly sink. Not only do they have their regular mortgage payment each month, but on top of that they must repay the hard money lender at higher-than-standard interest rates. Their monthly debt obligation is now higher than before, even though the inability to meet their original monthly payment was likely the reason for acquiring a hard money loan in the first place.

Hard money loans have shorter terms than a loan obtained from a bank.  The term can be as short as a few weeks and is not usually much longer than a few years. At the expiration of the loan term, the borrower must produce a substantial "balloon" payment representing the balance of the loan. This is something many hard money borrowers find extremely difficult to do. For many people, it is difficult to make a financial turnaround during the short term of a hard money loan, so they remain in financial difficulty when the term expires.

Hard money lenders are not generous negotiators when a borrower requests an extension of terms. Where a bank or other traditional lending institutions may be willing to work out a new payment schedule, a hard money loan is a strict arrangement. In the case of default, the hard money lender will foreclose, and much more swiftly than in a conventional foreclosure procedure. When a borrower defaults on a hard money loan, they will lose the asset they pledged to secure the loan in the first place. The most likely outcome in the event of a default on a hard money loan is the borrower will lose their property. Hard money loan defaults account for more foreclosures nationwide than all other loan defaults combined.

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