Defaulting on a hard money loan

I’ve been enjoying reading the various posts and learning from them, but here’s my first post regarding using hard money for a rehab.

As a new investor that has taken a course and learned some knowledge, I am anxious to get out and apply my knowledge. I am looking to gain some field experience initially via bird-dogging.

However, say one extra sunny morning I wake up, and after some extra strong coffee, I tell myself I can do this. I find a great property where I can realize a decent profit after repairs, holding, and other necessary costs have been factored in, and I fund this with a hard money loan.

What happens if I finish the project but can’t sell the house and fall behind on my loan payment? Or what if I’m a schmuck and decide halfway into the project that I can’t do this, and I default on my loan with the project unfinished?

Aside from probably not being able to work with that lender again, what happens with my loan with the hard money lender? Do they simply take the house, and the gain from their LTV %?

Does it negatively affect my credit? I’ve heard that hard money lenders don’t report to the credit agencies.

Not that I would do this if there were no harsh consequences other than losing the property, but I’m just curious what the consequences of a failed transaction are to the rehabber.

You would lose the property and these guys are pros and sucking up equity through fees, etc so count on owing them money which takes us to point two

Even is they don’t report they will undoubtable file judgement which all susequent lenders will see and will make financing anything difficult without putting whatever (house, car, etc.) in a STRONG equity position and then paying nightmarish rates.

If the rehab is the hurdle - find a house in need of the cosmetic, get someone you trust to look at it’s structure and if your credit allows finance. hml have their advantages, but lenders will lender deeper - freeing capital for future purchase and poor payment will haunt your regardless on the person holding the note


Make sure that if you get stuck with the house for a year (worst case scenario) and are forced to refinance, you can afford the holding period. If you can’t afford the holding period, you could really find yourself in trouble. Rehab loans are a great profit making tool for us investors, but you have to do your homework. Also, be 100% sure you are ready to do this. If you back out after they’ve lent you the money, you’re screwed.

Thanks for the comments guys. I’m sure once I’ve successfully completed a rehab or two, it gets easier to feel more at ease with these projects. Now to find and get that first one done and subside my nervousness a bit… :slight_smile: