Find out what happens when your home loan defaults and and what to do in such circumstances.
A home is your space of affinity. It is a dream come true when you purchase a house of your own. You invest your hard earned money and borrow from banks to purchase the house and therefore it is important to carefully plan for the monthly repayment to secure your loving shelter. Because life is full of surprises one must be ready to face and accept its outcome emotionally as well as financially.
What happens if you default on a home loan?
No one intentionally plans a home loan default in the EMIs. The unforeseen situations such as a loss in the business, loss of job, or medical emergencies, etc. that unexpectedly hits in life may put you in an unwilling situation where you face hardships in repaying your monthly EMIs ultimately resulting in a housing loan default. It is therefore recommended that you plan for your monthly repayment well in advance to avoid missing your home loan EMIs. (Continue to read- everything you must know before applying for a housing loan)
A default in a home loan can have many consequences. The home loan default consequences in India can be broadly categorized into two types, reputational and financial. Reputational consequences means the consequences which affect your reputation i.e. borrowing image as a borrower which refrains you from getting additional loans/borrowings from the lender & financial consequences means the penalty for late payment of EMIs, penal interest charges for the delayed payments, and EMI cheque bounce charges, etc.
Many home loan borrowers are still unaware of what will happen if home loan EMI-not paid. Many still think that delayed payments is still a casual thing, unaware of the fact that even a single EMI bounce can bring down the CIBIL score by 50-55 points. (Continue to read- CIBIL And Its Significance In Home Loan) This will adversely affect your overall CIBIL score which further impacts your borrowing capacity. Generally the lenders – Banks/HFCs/NBFCs judge the risk associated with lending by pulling your CIBIL report and studying your previous repayment history. A poor CIBIL score will not allow you to get any kind of additional credits in the future be it a home loan top-up, loan against property, balance transfer loans, commercial loan, business loan, or a personal loan. Lenders do not provide any type of home loan for CIBIL defaulters. Hence you must try to maintain your CIBIL score as well as regularly monitor it from time to time.
Not only does it affect your credit score and borrowing capacity, but you are also liable to pay the home loan EMI default charges. The EMI late payment charges will vary with the lender which includes a penalty charge which is around 1% – 4% on the unpaid EMIs and a penal interest rate charged up to 3% p.m. on the overdue amount for the period of default.
Also, read 10 common home loan mistakes.
Legal Action Against Home Loan Defaulters
Many have this mis-conception that lenders take immediate action if you default your EMIs. Lenders do take a legal action but prior to it they give you a grace period to repay your missed EMIs. The grace period for home loan EMI repayment is generally 3 months. You will receive a notice from the lender to repay the loan within 60 days. You can repay your EMI within this period. If you are still unable to repay the loan in 3 months, banks will then recover the dues by auctioning off your property as per SARFAESI Act 2002. The SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests) Act empowers the lender-Banks/HFCs/NBFCS to auction the borrower’s property and recover the dues if he defaults. However, you have a right to receive a notice from the lender before they take action to liquidate your property.
However, you may not benefit much from the auction. If the lender decides to auction your property which is an NPA (non-performing asset) you may not get the best price as it would generally be a distress sale. (The bank declares the property as an NPA when the loan amount is not paid for a period of 90 days.) Also the auction process (home loan settlement process) is usually time consuming. Hence it is favourable to sell off your asset-property on your own in case of an unfortunate situation of loan default.
Apart from sending the notices and reminders, another method which banks use for a home loan recovery process is by hiring the recovery agencies. Many times the borrowers have a bitter experience with the recovery agencies which is quite disturbing especially when you are stuck with some financial crises.
What to do if you are unable to pay your EMIs?
If at any point of time you feel that you are or would be unable to serve your EMIs smoothly the first thing you must do is to get in touch with your lender. Let your lender know about your financial difficulty. They might provide you a grace period or EMI moratorium for a few months. For genuine cases where you have an uninterrupted flow of monthly income, banks may offer an EMI-free period of 3-6 months. However the banks may continue to charge interest on the outstanding loan amounts for the moratorium period which you will have to pay later. (Continue to read on 10 effective ways to manage financial stress)
Only if you are unable to get the EMI-free period, you may consider liquidating other options such as your deposits, investments, assets, etc. To make you avoid facing such critical situations, lenders insist on going for protection plans with your home loans. The insurance plans provided by them have both the property cover as well as a life cover which covers your property from damage, and also covers your job loss, critical illness including the covide disease, death of the borrower, etc. Hence you and your loved ones are not overburdened to pay the dues.
Q. When does the bank mark you as a home loan defaulter?
Ans: If you default 3 months consecutive EMIs, you are marked as a defaulter and you will receive a 60 days notice from the bank to pay back the loan. If you fail to repay, the bank will recover the dues by the way of auction sale of your property. Hence, if you are a home loan defaulter legal action by the lender is certain.
Q. Can we stop bank EMI for few months?
Ans: It seldom depends from bank to bank. You cannot stop paying the EMI on your wish. For genuine cases the lender (Bank/HFC/NBFC) may offer a moratorium for 3 months to 6 months
Q. Can a home loan borrower be jailed for non payment of his home loan EMIs?
Ans: No. Non payment of the home loan EMIs is only a civil offence which cannot put him behind the bars.
Q. Is there any bank which provides a home loan for defaulters?
Ans: No, there is no bank which provides a housing loan for CIBIL defaulters.
Q. If the borrower has defaulted only on a month EMI, will the bank take any legal action against him?
Ans: No. The bank will take the legal action only after 90 days. If you default an EMI for a month you have to pay a penalty on the defaulted EMI. If you continue to default the 2nd month EMI the bank will then send you a reminder letter. Only after 3 months consecutive default in the EMI the bank will send a legal notice.
Q. How to pay missed EMI in HDFC home loan?
Ans: You can pay the missed EMI in HDFC by issuing a cheque of the unpaid EMI amount along with the delayed charges i.e. the penalty on the unpaid amount. You can also pay the amount online.
Q. How to pay HDFC home loan missed EMI online?
Ans: You can also do HDFC home loan settlement online. But you need to visit the branch once to get an NOC- no objection certificate for home loan closure.
Q. How to pay missed EMI in SBI home loan?
Ans: You can visit the nearest SBI branch to pay your missed EMI via cheque or demand draft along with the delayed payment charges.
Q. How to pay missed EMI in Bajaj Finserv?
Ans: You can either visit the Bajaj Finserv office in person or co-ordinate with its relationship manager or the collection team to collect the cheque.
Q. What is the minimum credit score required to apply for a home loan and to get the additional loan credits?
Ans: A satisfactory CIBIL score above 750 is favourable to get the loan credits.
Also, read How To Apply For Home Loan With Bad CIBIL Score.
Q. What are the rights of the borrower who is a loan defaulter?
Ans: The loan defaulter borrower has a right to
- Receive a legal notice from the lender.
- Receive a fair price of his property auctioned.
- Receive the balance amount of the auction proceedings i.e. the excess amount after settling the loan dues of the lender.
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