Taking a Home Loan is a long-term responsibility that extends upto 3 decades. So, before making a commitment to owning a house, you need to evaluate from all angles to make sure you are ready to apply for a Home Loan. Evaluate your income, expense, existing loans, and most importantly how to deal if about to default.
Unexpected things are bound to happen to everyone. While liabilities are hanging over your head, it is difficult for you to get out of the situation. Unforeseeable issues such as the loss of a job or a health issue to you or your dependents are always possible. Most importantly predicting your future income is a tough one. In today’s article, we’ll discuss how you can deal with a repayment defaulting circumstance.
Understand the Implications
If a Home Loan borrower has not paid his EMI for more than three months (90 days), the loan becomes a Non-Performing Asset as per Reserve Bank of India’s guidelines. In such circumstances, the banks have the right to repay the entire outstanding loan value for which you’ll receive notice within 3 months. If unable to do so within the stipulated time frame, banks will send an auction notice along with the property’s valuation. So, if you start defaulting on your repayments, you have approximately 6 months to retain your Home by clearing off the entire loan.
Consider the alternative
If you have got the hint that you’ll not be able to make the repayment, due to a variety of financial and domestic problems, convey your predicament to the bank. Based on your relationship with the bank, they might devise a feasible solution that will give you some breathing space. The most common solutions offered are Restructuring your debt, Rescheduling, or a one-time settlement.
Restructure your Home Loan
If you believe the financial struggles are temporary, reach your bank with relevant documents and you have to prove that the problem is temporary and you will be able to start repaying in some time. On evaluating your situation, the bank may opt to restructure your loan, which will depend on the loan’s age.
Try Part Payment and reduce EMI liability
Since Home Loans are linked to MCLR (Marginal Cost of Lending Rate), Interest rates may increase or decrease in the future. If there is a rise in your Home Loan interest, your EMI will rise proportionally which will become an additional burden. In such a case, you can approach the bank to extend the tenure so that the repayment value remains the same every month.
If possible, liquidate other assets
If you have any other savings, assets, investments, etc, try liquidating if it makes sense. Ensure that the value you liquidate doesn’t become an additional burden. It might be your Fixed Deposits, Equity Stocks, Mutual Funds, Insurance, PFs, etc.
If nothing works, sell the property yourself
If the repayment starts to become a situation you wouldn’t get out of, try selling the property yourself. In this case, the valuation you receive for your Property will be much higher than if the same goes to auction. Make sure to discuss the same with your bank before you list your property for sale.
What if nothing works?
If there’s no alternative to the situation you are stuck in, the bank will take possession of your property and auction it off to recover your outstanding dues.
The banks will initiate the repossession process according to the SARFAESI or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act. This bill passed by the Government of India in 2002, allows Banks to seize and sell the collateral to recover outstanding dues.
Do I lose all my money?
When a property is listed for auction, there are chances that the property will be sold for more than the outstanding dues to the lender. In such a case, the borrower has the right to proceed. The excess amount after the banks recover their outstanding should be paid to the borrower by the bank.
If the bank’s outstanding dues shortfall even after the auction, then the borrower is liable to pay the bank the shortfall of dues.
Additional Reading – All about Home Loan Balance Transfer
Impact on your Credit Score
Defaulting on your Home Loan will have serious repercussions on your future credit options. Banks or Lenders always look into your Credit Score even if the value of the loan applied for is small. Having a default reported on your credit report will decrease your chances of availing of a loan in the future.
Banks have to report credit transactions including defaults to Credit Bureaus who’ll determine your score based on your Credit Performance. This will be done in accordance with the Credit Information Companies (Regulation) Act. Having a default will affect your credit score adversely, thus reducing your credit limit and options.
Having a long tenure Home Loan should not be a gamble but a calculated move. Make preparations before applying for one by clearing off existing small loans.
Maintain a Contingency fund to avoid mishaps in future repayment. There’s also the option of Insuring your Home Loan which might help avoid future financial troubles.