NEED ADVICE! Unable to pay hard money loan

[Jay Lee]

I'm investing with an equal partner and unfortunately we're defaulting on our hard money loan because we don't have the money to pay it off and we won't be able to sell the home by the due date. A contractor also put a lien on that house. What would be the impact on my credit and would the lender be able to force us to sell our personal real estate if we are personally guaranteeing the loan? Any advice would be greatly appreciated. TIA.

[JD Martin]

Quote from @Jay Lee:

I'm investing with an equal partner and unfortunately we're defaulting on our hard money loan because we don't have the money to pay it off and we won't be able to sell the home by the due date. A contractor also put a lien on that house. What would be the impact on my credit and would the lender be able to force us to sell our personal real estate if we are personally guaranteeing the loan? Any advice would be greatly appreciated. TIA.

 1. Impact on credit - it will be shot. A housing default is a serious credit killer.

2. Yes, the lender can attempt to collect against personal assets if you are guaranteeing the loan. It's not a simple process, as they first have to foreclose on the existing property, attempt to sell it at a reasonable cost to minimize their losses, then file a suit against you and win that suit for any outstanding balance. If you have significant personal assets, they'll likely be successful, if you don't they may not.

3. The mechanic's lien is almost guaranteed to be wiped out in foreclosure unless you have a whole lot of personal money in this deal already or have experienced significant appreciation. 

I would recommend you try to work out something with the HML. No lender wants to foreclose; they want their money. Most will try to work with you if there's a good faith effort and some reasonable path to a successful conclusion. If your property is substantially complete and you lack some paint and window blinds, you can probably figure something out. If it's in shambles because you grossly underestimated the cost of the rehab, then you're probably screwed and should consider this an expensive education.