Home loans are integral and a common method to finance your home buy. The best home, at the most affordable interest rates leading to affordable home loan EMIs is the goal.
A loan borrower, are you? Having diligently paid all your home loan EMIs all the months, what if you have defaulted? Unable to pay the month’s interest on the loan, the consequences can be truly damaging. The reason could be anything. An illness, loss of job, accident, business losses, personal or something else. What are the consequences if there is a default on home loan and what are the options available to you in such a situation? Let’s discuss.
As per RBI guidelines, if the home loan EMIs are not paid for more than 90 days i.e. if it is continuous non-payment, the complete home loan becomes a non-performing asset. The bank may send a bank notice asking for the entire outstanding home loan. Once this term period crosses, the bank will imply The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), according to which it will seize the concerned property and sell the mortgaged property to recover the outstanding loan amount.
Now, this will result in two situations.
1. If the amount realised on sale is in excess of the outstanding loan amount to be recovered, it will be handed over to the borrower.
2. If there is shortfall, the same will have to be paid by the borrower.
Also, depending on the cost of the property, you will be required to pay long term capital gain tax for the period the property was held by you. The different tax implications based on the tax slab and the time the property was disposed off – Within 36 months or after 3 years will imply.
The impact on defaulting the home loan EMI payment may lead to an impact on your credit score – As per Credit Information Companies (Regulation) Act, 2005, all financial institutions are required to report default transactions to credit information bureau like CIBIL. This will show up all your past financial transactions history. Any such defaults, will lead to a setback on your future financial transactions when transacting with other financial institutions for loan or credit card.
Options to deal with home loan default.
1. Plan a contingency fund – Most financial planners suggest, before taking a home loan, one should plan an emergency funds pool, amounting to at least 6 months’ expenses. Debt management is important, and at such adverse times, these funds help a great deal. This will help you sail through tough times.
2. Restructuring loan – If you are unable to service the home loan due to temporary problems, and are sure to come over it and pay the EMI’s as usual, you can talk to your bank representative. Produce the relevant documents, come clear of your track record in servicing the home loan or any other such credit facility granted by the lender to you. This will prove your intention and ability to service the loan. This will also lead to the bank in rescheduling your home loan and time liability to resume the regular home loan EMIs payment.
3. Part payment to reduce EMI – If there is a decrease in your earnings or the EMI has gone up due to hike in interest rates, you can approach your lender to extend the time frame of your loan tenure. This will help in bringing down the EMI. This may not be possible if your home loan tenure extends up to your retirement age.
4. Liquidate your investments – This is that ultimate scenario, wherein you may have to make hard decisions. You may face problem with the regular cash flow, but on the other hand, you may have ample investments in mutual funds, bank fixed deposits, equity or such. When you liquidate your investments, you could pay off your loan and hence save your dream home, also avoiding any late payment charges.
5. Sell off the property by your own – This again is a difficult option, in an already difficult situation. You may require to talk to the bank officials, and manage to get your property sold by yourself. This will help in ensuring a profitable deal and fetch the best price on the property. This will help you pay off your liability and in case you are left with a good amount you can move-in to a smaller house in a less popular neighbourhood.
6. If it is a temporary cash crunch – In case you are facing a financial deficit, and are sure of secured returns and inflows in the future, you can break a fixed deposit or take a personal loan against security to furnish the home loan repayment and avoid any late payment penalty.
The legal complications are many! It is advisable to weigh your options carefully, before going ahead with any decision.
The bank also seeks a viable option, as you do. Litigation, the process of seizing and selling the property are all cumbersome. Have a cordial and thought about solution for all your problems. While the situation is complex, the right way to deal with it is knowing what works best for your scenario.