Cost of a property involves quite a big amount of money, so for majority of people buying a home on full cash payment is difficult to imagine. Therefore, for many, home loans are becoming the most preferred route for buying a residential property. Several studies show a dramatic surge in home loan applications in recent years, as reported by leading financial institutions in the country. In addition, home loans come with tax benefits under Section 80C and Section 24, which is an added advantage.
Property finance makes buying a home easy and comfortable, but there is also a downside of defaulting on a home loan EMI. Home loans, with an average tenure of 15 to 20 years, are a long-term liability. With job uncertainties and lifestyle-related health problems on the rise, managing a long-term commitment like a home loan can be a problematic affair.
Be it a critical illness or a job loss, many people land up in a serious economic crisis and can’t avoid defaulting on a home loan EMI. Having said so, we also need to remember that risk factors are an integral part of our life. And we cannot stop living, fearing about them. What we can do is – taking the maximum preventive measures.
Let’s find out the repercussions when someone is not able to repay their EMIs and what they can do about it.
What Happens When You Default On Your Home Loan EMIs
Regarding defaults, banks follow a set of guidelines. After the first default, someone from the customer relationship department might call you up, but if you don’t pay 2 consecutive EMIs, they will send a payment reminder notice. It is only after 3 back-to-back defaults on a home loan EMIs, banks will treat the loan as a non-performing asset (NPA).
At this stage, the borrower will get a legal notice from the bank, containing clauses related to the actions that the bank can exercise if the borrower does not clear the outstanding amount. Five months after the first EMI default, banks enforce the SARFAESI (Securitization and reconstruction of financial assets and Enforcement of Security Interest act’ 2002) and start the loan recovery process.
Enforcement of the SARFAESI allows banks to put the property up for auction. The borrower, within a few days, gets an auction notice from the bank, specifying the minimum auction price and the date of the auction, which is one month from the notice date.
Banks, however, don’t want to get into the troublesome process of property auction. They try to settle things through negotiations and usually offer the borrower six months’ time before auctioning the property.
Recently, the Supreme Court has stated that loan defaulters won’t have the right to be represented by a lawyer in ‘in-house’ proceedings of banks. But there are other rights that you should know about in case you’ve defaulted.
The Options You Have in Hand
If you could not avoid defaulting on a home loan, before anything else, calm yourself. Going into panic mode will only make the matter worse. Now, head over to the following steps.
Step 1 – Get your papers ready
Instead, organize yourself and get your documents in order. Besides the home loan papers, try getting the documents of your previous loans, which you have successfully repaid. This can be a car loan, a personal loan, or a credit card repayment. Now contact the bank and tell them you want to discuss the issue. Show them your spotless repayment record of previous loans. These records will prove that you are not a habitual defaulter, and the lender will be happy to talk to you and sort things out.
Step 2 – Ask for more grace period
Banks always try to help a genuine borrower. So, be honest, and state why you cannot repay the loan and what you are doing to get things on track. Submit a detailed report about your endeavours and ask them to extend the grace period. Professionals get an extension of the grace period without any problems.
Step 3 – Loan restructuring
You can ask the lender to restructure the home loan. A restructuring of a loan can either imply the reduction of interest rates, or an increase in the tenure. In both cases, the EMI of your home loan will go down, which might make things easy for you to repay the loan. Banks agree to a restructuring proposal because they do not want to take the hassle of auctioning a property.
Another way to lessen your home loan burden is the one-time settlement. In this process, you can request your bank to waive off the loan interest and only the principal amount is left to be paid. But remember, this will reflect on your credit score.
Step 4 – Liquidating your assets and investments
If you have a car, jewellery, or any other assets, sell those off. It’s painful, but it is better than losing possession of your home. Also consider liquidating existing investments, such as shares, mutual funds, or fixed deposits. The money will give you a breathing space for a few months, within which, you can work out other repayment options. You can also make a lump sum payment and reduce the EMI amount.
Financial advisors recommend preparing a contingency fund before taking a home loan. The fund should take care of at least six months’ EMIs. This will help you tackle a short-term cash crunch so that you can avoid defaulting on a home loan EMI.
The best thing, however, is to take insurance against critical illness, permanent disability, and job loss. These are not a part of the standard home loan insurance policy. Insurance companies sell these as riders.
At the time of taking the home loan, make sure that your insurance policy covers these items. This will help you keep your head above water during difficult times and avoid defaulting on a home loan EMI.