What Happens When You Default on Hard Money Loan?


When investing in CRE, it is not possible every time to have the required funding in hand. In such instances, the investors can take a loan from the hard money lenders, especially those with poor credit scores. It is not easy to acquire funding through traditional means. The hard money loan assures financing on time.

They are undoubtedly a great alternative as herein, the qualification or the requirement for getting the loan is relatively low. The borrower here has got the option to get the funding fast. No matter why you are taking a loan, the expert analyzes the situation and provides you with the financing on time.

However, the borrower must make the payments on time to avoid defaulting. Proper rules and provisions are made for borrowers who default on the loan.

The document you will sign before getting the loan will specify the situation when you default. Having an idea about it will guarantee you make the payments on time and avoid complications. The guide here will determine the details that you need to know.

Defaulting on a loan- What does this mean?

When borrowers choose to go for a hard money loan, they are obliged to make the monthly interest payment to the CRE lender. However, if borrowers fail to make the required payments, they default on the loan.

The default condition work will be specified in the loan papers signed at the closing cost. The hard money loan default status is usually triggered when the borrower breaches the contract rule or fails to make a payment on time.

Even if the borrower misses one month of interest payment or partial payment, he will default. So it is vital to know the details and make the interest payment on time, or else the consequences can be pretty challenging.

Consequences of defaulting on a hard money loan

The hard money loan document will specify how to handle the default situation and clear the outstanding loan. Any delays made during the time of payment or maintaining the current account will be considered a default.

Corrective measures will include making timely payments or paying any applicable fines. If the payment is missed, the term will consist of 30 days to make up for the deficit before the property enters default to take necessary action.

Mentioned here are the results or consequences you might face when you default on a loan.

  • You may lose the property

Like traditional mortgage loans, your home here will be on the line with the hard money loan. You might have bought an investment property with the funds. In such cases, you won’t lose the primary residence.

However, you will surely lose your investment in the property. So before you choose to go for the hard money loan, it is vital to analyze the situation and see if you can repay the amount on specified terms.

You need to consider the monthly payment and also the longevity. For instance, how long do you plan on keeping the property? Have you opted for a fix and flip the property, or will you rent it out?

If you have planned for a fix and flip property, then you need to see if the property will be worth enough to clear the dues in full when you sell the property. If you choose to rent out the property, you must see if you will have enough cash flow to keep up with loan payments.

  • The credit score will reduce

When you make a default on the loan payment, then it is your credit score that will pay the highest price. This is because it’s a foreclosure which will bring 85 points to 160 points. The drop here will depend entirely on your current credit score and the functional loss in your state.

Even if you have got a higher credit score at the time of default, then it will reduce to a great extent. Besides this, you will have to take different measures to increase your credit score. If you use any illegal method, you can face significant challenges and even legal issues.

Also, with a low credit score, you won’t be able to get any other loans or assistance. It will be challenging to secure a new job, rent an apartment and obtain other services that you might require.

  • You will lose the investment

When you plan to go for a hard money loan investment, you will be required to invest on your end. If you have had the loan for quite a long time and have made payments, you will lose any money you put in it.

Let’s consider you took a loan of $100,000, and the home value is $150000. Herein you must have put in $50000 from your fund. If you made a payment of about $8000 in the main time, the total investment would come to around $58000.

However, if you default on the hard money loan, the lender can take the property and sell it while the accumulated fund will be used to pay off the outstanding loan. The lender can sell the home lower than the original sales price to get the money back.

This will leave you empty pockets and a loss of real state from your portfolio. You must know that if the foreclosure sale does not cover the loan balance, he will keep you on the hook even after losing the property.

How to avoid defaulting?

As a borrower, you must have a properly planned strategy to know how to handle the situation and get out of it without any complications. The most common exit strategy would be selling the property or buying a refinancing option through traditional bank loans.

If you get into financial trouble and are facing difficulty making monthly payments, you must communicate with the lenders. Usually, some hard money companies will understand the situation and work with you to modify the payment structure. It will make things and assure the lender gets the required amount without difficulty.

Having a face to face communication will surely help you. The experts will analyze the situation and see what they can do for you. So it is an excellent way of knowing the right technique to handle the situation.

Be it reducing the payment terms or coming up with something flexible; they will do it all to assure both of the parties can benefit without actually going through the lengthy legal process of foreclosure, as here, the lender will end up suffering a loss as he is required to pay the legal fees for the foreclosure that other associated aspects.

Are hard money loans a bad option?

Just like any other financial instrument, you must understand the terms and conditions of the loan before you go for it. The hard money loans are a great way to get the funds needed to increase the real estate portfolio. But make sure you can afford the loan payment on time.

If you take a loan from a traditional bank, then when you default on a term, you will pay the price, which means you will end up damaging your credit and losing the property and also the investment.

So before you take a hard money loan, make sure you consider your property and your finances. It will help you understand that selling for a higher price will generate enough cash flow for you to cover the cost of the hard money loan.

If yes, hard money loans are an excellent option for you. It can be a lot easier way to get the funding fast. In addition, this provides a better chance of getting real state opportunities without going over the budget.


In the current scenario getting a good hard money loan, no doubt, can be pretty tough. When you are new in the industry, you need to know the terms and conditions to get yourself a good deal.

If you don’t understand the process or any other associated aspect, then contacting a good professional who can help you can be pretty beneficial. You can contact Private Capital Investors to get help.

They have experienced professionals who can help you connect with the lenders who can provide you with great rates and loan terms. Also, they will specify the details so that you do not face any complications later and have an easy time using the loan amount for your benefit.

Want to learn more? Get in touch with us today.

Similar Blog

Want to learn more? Get in touch with us today.

Our experienced team is ready to assist with your financing needs.

2101 Cedar Springs Road Suite 1050 Dallas, TX 75201