Repercussions of Defaulting on a Hard Money Loan

[James H.]

I have been considering the idea of using HMLs in the future. Not that I would plan to, but I was hoping some of the HMLs or folks with experience borrowing from HMLs could describe what happens if you default.

So far, this is my understanding of the use, benefits and risk of using hard money:

1) + access to cash you don't have or do have and don't want to tie up.

2) + Short term financing that can be used same as cash for discounted purchases and expediting closings and ability to purchase properties otherwise not financeable with a mortgage due to property condition.

3) + Short term financing for rehab costs.

4) + Debt that does not count against your debt to income ratio when looking to refinance the property after rehab is complete.

5) + Refinancing terms of HML is typically easier than doing a cash-out refi.

6) – Terms/up front fees of Hard Money demands higher margins on a deal.

7) - Most hard money is for 6-12 months, but mortgage lenders may require up to 12 months seasoning which would create a default on the HML or a fee generated to extend the HML if mortgage lender required 12 months seasoning. (unless you could refi exactly the same day that HML expired ).

8) - One cannot be certain that long term financing will be available for long term hold investors even once seasoning has been satisfied.

9) - Less experienced rehabbers may not have enough experience to flip a house in time or within budget to not default on the loan.

10) - HMLs will require a licensed contractor to do the work so DIYers can't save by doing the work themselves.

So this is my general understanding of Hard Money and how it can work for and against an investor. I may not be right on some or many points - please correct me where I misunderstand.

Ultimately, what happens if you default on the HML and/or can't afford to pay an extension? I assume that the HML takes the property and you loose any cash you have invested in the deal. What other negative repercussions usually happens and/or could happen?

[James H.]

Although I am very thankful for the info provided in the responses given so far, I'm a little surprised at the lack of interest/input on this topic. To me, this seams like one of the hard questions that needs to be asked and considered to make a fully informed decision when borrowing money.