In a perfect investing world, every house flip project would unfold seamlessly from acquisition to renovation to eager buyer snatching up your property as soon as you list it. Unfortunately, obstacles and challenges often arise in real estate investing that can quickly gobble up reserves, and might even require an adjustment to your exit strategy. The key is to remain calm, communicate with your lender, and make sure you have a clear understanding of the potential consequences of late payments – before finding yourself in this predicament.
Fix and flip loans are asset-based, with your property serving as collateral. In most U.S. states, when you receive borrowed capital from a private direct lender, you'll execute a Deed of Trust and a Promissory Note, granting the lender foreclosure rights in case of default. In the event you find yourself in the situation where you cannot make your payment on time, it is critical to understand your lender's late payment policy beforehand, and be fully aware of all of the available mitigation options to prevent default.
Key Questions to Ask Your Hard Money Lender
Is There a Grace Period?
Most legitimate private lenders will offer borrowers a grace period during which a late payment will not accrue a fee. If a lender's grace period is 10 days, for example, and payment is due on the 1st of the month, the payment would not be considered officially late until the 11th. Be sure to ask your lender if they offer a grace period, and how many days it is.
How Much is the Late Fee on Fix and Flip Loans?
Once you've let the grace period pass and your loan is in "past due" status, a hard money lender will typically charge you a late fee that is a specific percentage of your missed payment. For example, if your monthly payment is $2,500 and your hard money lender charges a 10% late fee, $250 will be added to the amount due. When you send in your late payment, be sure to add the additional fee, or your loan may remain in past due status.
Can I Send a Partial Payment?
Some lenders will return your partial payment to you immediately upon receipt and insist that you bring the loan current with the full amount of the missed payment and the late fee. However, in most cases, if you send in a partial payment to your lender (as long as you have not defaulted on the loan and your property is not yet in foreclosure) it will be accepted and deducted from the amount you owe. Be aware that your account will still be in arrears. Any partial payment you make will not prevent the lender from escalating your loan from "past due" status to "in default."
When Does My Account Change from “Past Due” to “In Default?”
If you have not made a payment 3 to 4 weeks after your fix and flip loan's due date, and you have not contacted your lender to let them know when to expect your payment, procedures may already be taking place at your lender to escalate your loan to default status.
If you have contacted your lender and let them know your plan, you will likely be given more time to bring the loan current. However, if your lender has no idea why your payment is late or what you plan to do about it, they may conclude that you have defaulted on the loan agreement. A letter of intent to proceed will be prepared. This letter is called a "Notice of Default" (NOD) and once you've received it, your loan is headed to foreclosure.
What Steps Can I Take Once My Loan is in Default?
Communicate. Communicate. Communicate. This is not a time for you to go silent. Communicate with your lender about your plan to bring your account current. If you have a buyer under contract for your flipped property and are waiting for escrow to close, let your lender know this. If you are expecting funds to pay your account in full, let your lender know when those funds are expected in your bank account. If you have established a good relationship with your hard money lender and communicate in good faith, they will be more likely to work with you to delay the default and slow down the foreclosure process to give you more time to bring your account current.
What Can I Do if My Hard Money Loan is in Foreclosure?
Once your hard money loan is in foreclosure, many lenders will no longer accept payments. To prevent the sale of your property, you must pay the entire amount due—including past due payments, late fees and the outstanding loan amount. This is the point where many borrowers stop communicating, but there are still many ways your lender can help, so be sure to keep the lines of communication open.
Even if your loan is already in foreclosure, some lenders will work on a "forbearance" agreement with you. A forbearance pauses the foreclosure process and gives you more time to pay off or reinstate your loan. If you request a forbearance, let your lender know how and when you plan to bring the loan current, and when you will be able to pay the loan in full. This is where maintaining a good relationship with your lender really helps. With a forbearance, the lender may even accept partial payment to reinstate your loan. If you have built mutual trust, your lender can help you avoid losing your property.
Is it Possible to Extend the Length of the Loan to Give Me More Time?
If you have already defaulted on the loan, you have probably missed the opportunity to request an extension. While your loan payments are current is the time to request an extension -- BEFORE you begin making late payments. Many hard money lenders will grant you one or more extensions on your fix and flip loan for an additional term of 3-12 months. If your loan's maturity date is approaching and you need more time to pay off the principal, let your lender know you would like an extension. Your lender will want to know why you need more time and what your plan is to pay the loan off at the end of the extended term. You will likely be charged a fee for the loan extension, so be sure to ask your lender how an extension works and how much it will cost.
Keep Calm and Communicate
In the business of house flipping, even the best exit strategy can sometimes hit a snag. The best preparation for experiencing a financial hurdle is knowing what to expect in advance, staying calm, and communicating with your lender.
The ideal borrower-lender relationship is one of transparency and mutual trust. At Anchor, It is a top priority to provide our borrowers with all of the information they need to succeed and grow their business, and we ask loan applicants to help us by being honest about any financial challenges or other possible hurdles Anchor can help with. We approach each customer relationship as a partnership, and we take pride in watching our borrowers benefit from the leverage Anchor financing provides.
Anchor was founded by real estate entrepreneurs, so we know first-hand what our customers are facing, and along with financing, we also provide expert advice to help them achieve their goals. In the event one of our borrowers falls behind, we have a series of strategic interventions we offer before resorting to foreclosure.
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