In a perfect world, every one of your fix-and-flip projects would run smoothly from purchase to rehab, with buyers snapping up your flipped homes the day they hit the market. Unfortunately, real world snags happen all too often and fix-and-flip investors sometimes find themselves overextended—with their capital reserves stretched to the limit. If you should ever find yourself in that stressful situation, it’s important to know in advance what can happen if you are unable to make your fix-and-flip loan payment on time.
Know Your Hard Money Lender’s Late Payment Policy in Advance
A fix-and-flip loan is an asset-based loan, meaning your property will serve as collateral on the loan. Depending on which U.S. state your property is in, you will sign a Deed of Trust and a Promissory Note giving the lender the right to foreclose and sell the property if you default on the loan. In some states, a property foreclosure must be conducted in a courtroom through a court process.
A legitimate hard money lender is not a “loan shark” who wants to see your project fail so they can pounce on your property. On the contrary, a legitimate hard money lender will see a fix-and-flip loan customer as a potential long-term partner whose success is in the lender’s best interest. Before you sign on the bottom line on a fix-and-flip loan, it’s important to know in advance what your lender’s policies are regarding late payment, and what, if any, mitigation is available to help you avoid default.
7 Questions You Should Ask Your Hard Money Lender About Paying Late
- Is there a grace period before a late fee is applied?
In the lending world, the term “late” has a few different implications, each of which have different consequences. Most legitimate hard money lenders will give you a grace period during which your “late” payment will not accrue a late fee. If a lender’s grace period is 10 days, and your payment is due on the 1st of the month, your payment would not be considered 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?
Once you’ve let the grace period pass and your loan enters “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 $2,000 and your hard money lender charges a 10% late fee, $200 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 make a partial payment?
Some lenders will return your partial payment to you and insist you bring the loan current with the full amount of the missed payment plus the late fee, but in most cases, if you send in a partial payment (as long as you have not defaulted on the loan and your property is not yet in foreclosure) it will be accepted by the lender and deducted from the amount you owe. Be aware that you will, of course, 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 is my fix-and-flip loan considered to be 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 decide whether to escalate your loan to “in default” status.
If you have contacted your lender and let them know your plan to pay, 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 come to the conclusion that you have defaulted on the loan agreement. If this is the case, a letter of intent to proceed with foreclosure is probably being prepared. This letter is called a “Notice of Default” (NOD) and once you’ve received it, your loan is on the path towards foreclosure.
- What can I do if my fix-and-flip loan is in default
This is not a time for you to go silent. Communicate with your lender and be up front about your plans to bring your account current. If you have signed a contract with a buyer for your flipped property and are waiting for escrow to close, let your lender know this. If you are expecting funds from another source to pay your account in full, let your lender know when those funds are expected to arrive in your bank account. If you have established a good relationship with your hard money lender and you are communicating in good faith, they may work with you to delay the default and slow down the pre-foreclosure process to give you more time to bring your past due account current.
- What can I do once my fix-and-flip loan is in foreclosure?
Once your fix-and-flip loan is in foreclosure, many hard money lenders will no longer accept payments. To prevent the sale of your property by your lender, you must pay the entire amount due—this includes past due payments, late fees and the entire outstanding loan amount. This is the point where many borrowers stop communicating with their lender, but there are still many ways your lender can be helpful, so be sure to keep the lines of communication open.
Even if your loan is already in foreclosure, some lenders will work with you to draft a “forbearance” agreement. A forbearance is an agreement to pause the foreclosure process and give you more time to pay off or reinstate your loan. If you request a forbearance, be sure to let your lender know how you plan to bring the loan current and when you will be able to pay the loan in full. This is where having 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 work with you to help you avoid losing your property.
- I’ve made all my fix-and-flip loan payments on time, but I can’t pay off the loan at maturity; what can I do to avoid foreclosure?
In most cases, if you have already defaulted on the loan, you have missed the opportunity to request an extension, but if your loan payments are current, many hard money lenders will grant you an extension 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 may 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 made plans can sometimes hit a snag. The best preparation for hitting a financial hurdle is knowing what to expect in advance, staying calm when things get stressful, and being willing and able to communicate your “plan B” to your lender.
The ideal borrower-lender relationship is built on transparency and mutual trust. It is a top priority at Anchor to provide our borrowers with all of the information they need to succeed and grow their businesses, and we ask loan applicants to help us by being honest about any credit challenges or other possible hurdles Anchor can help with. We approach each borrower relationship as a partnership, and we take pride in watching our borrowers benefit from the leverage our 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 borrower falls behind, we have a series of strategic interventions we offer before resorting to foreclosure. Since the credit crisis, Anchor has funded over 16,500 loans with fewer than 2% resulting in foreclosures.
If you’re interested in taking the next step into the world of fix-and-flip real estate investing, Anchor Loans is happy to help you get started. We know that this process can feel overwhelming, but it doesn’t have to be. Fill out our free online borrower application, and we’ll do all that we can to help you every step of the way.