The question of what happens to hard money lenders in NY is an important one—at least for the hard money lender. Can the borrower file bankruptcy in order to retain the property as a person can do with a traditional loan? What kind of protection is there for borrowers and lenders of hard money loans?
Terms of a Hard Money Loan
One thing to keep in mind is that hard money loans are NOT the same as traditional loans by any stroke of luck. Even though a regular mortgage is secured by property and may be considered a hard money loan based on that, it does not meet the definition of a hard money loan in other ways. For instance, people do not obtain hard money loans to secure their primary residences—these loans are for commercial property ventures such as apartment buildings, rental housing, warehouses, manufacturing facilities and the like. Hard money lenders are not interested in the credit worthiness of the borrower but only in the value of the property the borrower uses to secure the loan.
Default and Foreclosure
Hard money loans are short-term loans that usually do not extend beyond one to two years. This depends on the amount of the loan and its purpose. Unlike traditional loans hard money lenders in NY are not interested in loaning money to owners who live in their property. These loans are typically for commercial borrowers and investors. Because these loans are secured solely by real estate, the credit worthiness of the borrower has no bearing on whether a hard money lender in New York will loan money to particular borrower. The hard money lender depends on the viability of the property to turn enough of a profit to allow the hard money lender to recoup his investment if the borrower should default.
While it is possible for a borrower to avoid foreclosure when he or she defaults on a hard money loan, this is not necessarily a “given.” When you default on a hard money loan, the hard money lenders in New York has the right to appear before the bankruptcy judge in order to work out a restructuring plan for your loan. However, the high interest rates on these loans often make it impossible for the lender to work with the judge in order to obtain an equitable restructuring arrangement.
In the event the hard money lender in New York and the bankruptcy judge are unable to help you reach a restructuring agreement with which you can both live, the lender can continue to pursue foreclosure or you can agree to sell the property in order to pay off the loan. This arrangement is likely to be more in your best interest since foreclosure will allow the lender to retain all of the money from the sale of the property even if you only owe $30,000 and the property sells for $100,000. This is one very important reason you should not enter into a hard money agreement unless you are reasonably sure you will be able to follow through and make the payments.