Over the years, First Capital Trust Deeds has received this question, “How much down payment is required to flip a...
What is a Hard Money Loan Balloon Payment?
A hard money loan balloon payment is the total principal balance of the loan plus one monthly payment due in full at the end of the loan term, which is usually 6-24 months from the start of the loan. Balloon payments are a common feature of hard money loans as most are short-term bridge loans with interest-only payments rather than 30-year amortizing loans like conventional mortgages.
Below is an example of how the balloon payment works:
The Note will feature information about the Maturity Date and the Balloon Payment:
If you cannot make the balloon payment at the maturity date, you have the following options:
- Loan Extension
- Sell or Refinance
- Notice of Default (Lender’s Option)
Loan extensions on hard money loans are often granted to borrowers who have made on-time payments over the course of the loan. When borrowers are consistently delinquent, hard money lenders are less inclined to extend the loan.
Lenders normally charge the borrower an extension fee, which can be added to the next payment, be paid direct through the loan servicer, or added to the back of the loan and paid when the loan is paid off through a refinance or property sale.
Sell or Refinance
To avoid a balloon payment, you can sell the property or refinance the loan prior to the maturity date. This keeps you from having to come up with the full principal balance of the loan.
Notice of Default (Lender’s Option)
If monthly payments have been sporadic or the borrower is not able to sell the property or refinance the loan to satisfy the balloon payment, the lender has the legal right initiate foreclosure by filing a Notice of Default. Foreclosure is usually a last resort taken after working on other measures to satisfy the balloon payment. However, borrowers can avoid foreclosure by making on-time payments and communicating with the lender.
In my experience, I’ve found that borrowers who are frequently delinquent on payments or cut off communications with the lender for long periods of time, find themselves facing foreclosure more often than borrowers who are on-time and keep the lender apprised of their situation. It’s simple but I see this when borrowers get overwhelmed by taking on too many projects experiencing costly delays at the same time, like we’ve seen since the start of COVID.
Balloon payments are written into nearly every hard money bridge loans. The formula is very simple: principal balance + one month payment = balloon payment. At maturity, when the balloon payment is due, borrowers can either get a loan extension, sell, or refinance the property. If the lender does not want to extend the loan, the lender has the legal right to file a Notice of Default to initiate the foreclosure process, which is seen as a last resort.
This question has come in through the website dozens of the times over the years from prospective house flippers...