What happens when a HML forecloses on a house?

[Mike Nelson]

I've never dealt with a HML before and I'm just curious to know what happens if things go wrong.

From my understanding the hard money lender will be in the first position. Where does that leave me as the buyer? Also, let's say if I'm unable to sell the property or refinance it with a bank, what happens then? Will this have a negative effect on my credit report?

[Jeff S.]

The HML will want to be in first position, Mike. If you don't satisfy the loan, they will have the option to foreclose and you will lose the house and probably everything you have into it. It's important to understand that, in spite of what some think, virtually no hard money lender wants the house. They want the points and interest and, of course, their principal.

Realistically, if you cannot sell or refinance a house you purchased using hard money there are several options and they’re not necessarily all awful. Here are a few off-hand and in no particular order:

1) The HML will foreclose and you will lose the house.

2) You could agree to sign the house over to the HML using a deed-in-lieu of foreclosure. This is much simpler, faster, and cheaper if it's obvious all is lost anyway.

3) You can ask for an extension under the identical terms and make payments to the HML using your own money, or that of a new partner, for as reasonably long as it takes to sell or refinance.

4) If it looks like things are going well but you simply need more time and don't have any more cash, the HML might agree to convert your loan to accept all interest, points, and principal, when you sell. (Why didn't you ask for this in the first place?)

5) If this is a killer deal (why else would you do it?) the HML might agree to an equity position and perhaps split a percentage of the profits when you sell. Or, any other creative partnering agreement you can work out.

Again, the HML doesn't really want to take the house. Because of this, you have a tiny amount of leverage, even though they hold all the cards.

Your credit should not be affected by any of this. Realistically, since most HML's are backed by the property, not you or your credit, I'd try to negotiate away any personal guarantee. We never ask for a personal guarantee.

Jeff