What to Do if You Default on Your Home Loan

For most people, a home loan EMI is usually the largest monthly EMI payment liability that they have to manage in their lifetime. And one should always avoid defaulting on home loan EMIs. However, a home loan is a long term commitment (usually 20 years or more) and keeping up with regular EMI payments may not be easy if you lose your job, incur losses in your business or have to spend on expensive medical treatment for yourself or your family. Though not something to look forward to, people sometimes do find themselves in a situation where making the regular home loan EMI payments is no longer possible. In case of such an eventuality, the following are some steps you can take to resolve the situation if you are unable to pay your home loan EMI as per the pre-determined schedule.

Understanding How It Works

You have to understand that the bank would not seize your home outright if you have missed one or two home loan EMI payments. Seizing a property is in fact the least preferred option that banks have their disposal. Seizing your property and auctioning it is often a problematic and long drawn process for banks and they would rather avoid it altogether. This even though the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act, 2002) has made the process more streamlined than it was before. However, missing even a single home loan EMI will definitely cause an adverse affect on your credit score thus it is best not to miss even a single EMI payment.

In reality, if you have skipped 3 or more EMIs, then the bank starts the collections process by sending a legal notice asking you to pay the overdue EMIs. If you do not respond or settle the dues within the next two months, they send you a “final” notice mentioning that they have evaluated the property and the fact that it will be auctioned. The auction date is usually set for one month after this notice is sent out. If you are able to resume regular payments even at this point of time, the auction will be called out. Thus, in total, you will have a period of approximately five to six months after the first missed EMI payment to settle the bank dues and start paying again.

Are you unable to pay your home loan EMIs?

If you are unable to pay the EMIs even after this five or six month period, then you should consider the following options to save your property from being seized and auctioned by the bank.

• Ask for a Grace Period: You can ask for a grace period from the bank by providing them with documentary evidence of genuine reasons why you missed the previous EMIs. Valid reasons that might lead the bank to provide you with the grace period include loss of your job or diminished business sales/losses or emergency expensive medical bills. Most banks will allow you to resume payments after a pre-determined period provided you agree to make the penalty payments imposed by the bank. However, you will have to show proof i.e. documented evidence of your inability to pay before the bank decides in your favor.
• Try to Get the Loan Restructured: If the reasons for your bad finances are complex and you think that you would not be able to meet the high interest rates or personal expenses even in future then you can ask the bank to restructure your loan. The bank may reduce the individual EMI payments by increasing the tenure of the loan. This is however at the bank’s discretion and there is no guarantee that they will agree to restructure your loan.
• Liquidate Your Investments or Capital Assets: This may be one of the ways you can settle your dues if the bank refuses to give you a grace period or does not provide you any alternatives. You can liquidate your investments such as mutual funds and fixed deposits to make these payments. Even selling off non-profitable traditional insurance policies might free up funds to pay off the EMIs till your finances improve. You can also try to sell your other capital assets such as vehicles or valuables to settle the loan.
• Look for Alternate Financing: The reasons for inability to the home loan EMIs may differ from person to person. Some financial products offer great help in such cases. You could try to get a loan against the surrender value of your LIC policy, PPF etc. Some typical financial products such as insurance policies provide coverage against EMI dues in case of job loss or other emergencies. These policies may be sufficient to pay off EMI dues for a home loan over a two to three month period. In fact, some banks usually ask you to take such a cover at the time of taking the home loan in order to reduce their lending risk. Even if your bank does not insist on a home loan insurance policy, you can buy it yourself from almost all major.
• Seek Help from Counselling Centres: Most banks offer counselling for your home loan settlements depending on your specific situation. They provide you ways to manage and pay off your loans without defaulting on it altogether. The might be able to provide you with options to settle the existing dues while not taking on any additional debt.

Conclusion

If none of above options work in your case, then it may be best to look for a buyer yourself and sell off the property. Though the bank will be the executor of this property sale, any proceeds from the sale that is over and above the bank’s total dues (including home loan amount plus bank charges and penalties) will actually end up in your pocket. Through this sale, you may lose an asset but you will no longer have to worry endlessly about your missed EMIs.