“What happens when you default on a home loan in India?” asked one of our Quora followers. To begin with, as opposed to the popular belief, a home loan default is not the end of the road if you have maintained a clean credit history and record till date.
Taking a home loan is a long-term responsibility. Considering the present job scenario in India, it is quite challenging to predict how your finances will progress over time. The chances of unforeseeable events like a loss of job or health issues are always a possibility.
We present you some options in case you default on repaying your home loan.
Understanding the implications
As per the central bank of India’s guidelines, if the borrower has not paid the EMI for more than three months (90 days), the home loan becomes a non-performing asset (NPA). In such a case, the bank may ask you to repay the entire outstanding loan amount.
After three months, you will get a legal notice to repay the dues. In case you are not able to clear the dues at this stage also, after another two months, the bank will send you a notice with a valuation of your property stating that it will be auctioned. Now, if you look at the process carefully, it is evident that banks give you good six months before auctioning the property.
The alternatives
If you are unable to make regular payments towards your home loan because of an untoward situation such as loss of your job or an accident, then you must discuss your financial predicament with your bank. Depending on your case and your relationship with the bank, your bank might come up with some feasible solution for you.
Your bank may allow either debt rescheduling, deferring of payment, loan restructuring, or one-time settlement.
Restructuring: In case of a temporary financial crunch, approach your bank with relevant documents. You will have to prove that the problem is temporary, and you can repay the amount after some time.
Your bank will evaluate your situation. Once convinced, the bank may reschedule your home loan.
Part payment to reduce the EMI burden: There are times when the amount payable in the form of EMIs increases due to a rise in the interest rate or a decrease in your income. If this is your case, then you can request your bank to increase the loan tenure so that the amount payable each month reduces.
Liquidating your other assets: If you have other assets like mutual funds, equity, or fixed deposits, it makes sense to liquidate those to repay the outstanding amount.
Selling your property: If nothing works, then selling the property might be a good option. However, before doing so, do discuss it with your bank.
What the bank can do?
If none of the above-suggested alternatives works for you, then the bank might initiate the process of repossession of the purchased property for recovery of the outstanding dues.
Before we delve deeper into this, let us introduce you to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act or SARFAESI. Passed in 2002, this legislation allows banks to seize and sell the property to recover the outstanding loan amount.
What if the amount realised from the sale of the property is more than the outstanding amount? Well, in such a scenario, the bank will return the excess amount to you. However, if there is a shortfall, then you are bound to pay the remaining amount.
Impact on credit score
It might appear once you consider all the possibilities that defaulting on a home loan may not be that serious, after all? Wrong.
Defaulting on a home loan can have serious repercussion on the financial stability of your family and your credit history.
As per the provisions of Credit Information Companies (Regulation) Act, 2005, banks are mandated to report all transactions of credit, including default, to the Credit Information Bureau. Thus, your default will also be reported, which will impact your credit score adversely.
This will also reduce your credit limit and chances of availing any loan later.
Precautionary measure
Before taking a home loan, please do ensure that you take adequate stock of your financial health. It is also important to clear any other loans that you may have availed in the past.
Also, always have a contingency fund before you opt for a home loan. If you are not sure about your future financial situation, make sure you have a home loan insurance to avoid any financial troubles later.
Further reading:
I have applied for pmay subsidy thru Axis Bank in Feb 2019, but the bank has not lodged my application to nhb.
Bank says that your application shall be submitted to nhb in bulk as we have wait for a call from them and allowed to submit. The second deadline for submitting application in Mig category expires in March 2020.Shall I get the subsidy after March 2020 in case Axis bank fails to submit. What is alternative. Please send your suggestions to vanaar@rediffmail.com as well.Thanks.
Hello Ranjit, please follow up with your bank on the status of your application. Without submitting the application, you will not get the subsidy.