Owning a house is a dream of almost 90% of the people, but it is quite challenging to own a home without borrowing money. To fulfil the dream of a home buyer, NBFC’s and banks have several home loan schemes to offer. Home loans generally come up with a higher rate of interest due to which home loan borrowers are unable to make EMI payments on time. Higher interest rate is not the only reason for default, but reasons like job loss, a medical emergency can also lead to a default on the home loan. According to guidelines provided by the central bank, Reserve Bank of India, banks consider home loan default when a borrower misses three EMI payments and is behind by 90 days. In some cases of home loan default, the bank can also seize the secured asset, which was pledged at a time of availing the loan. Let’s discuss the home loan default in detail and learn the ways how to avoid default on the home loan.
When does home loan become Non-Performing Asset?
Under the regulation of SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act), if a borrower is unable to pay the Equated Monthly Installments (EMI) on time for 90 days then the lender can ask a borrower to pay the principal amount as well as interest, that is when a home loan is considered Non-Performing Asset. In case the borrower defaults on such payments, then the mortgaged asset is seized. Banks seize the asset to recover the loans. Initially, lenders issue 60 day notice to the borrower. If the defaulter does not even make the payment during the 60 days, then the process to seize the asset begins. The problem of a borrower does not end when the bank sells the property if the property is sold for a price lower than the outstanding loan amount, then the borrower will have to pay the remaining amount. In case the value of the property is high, then the extra amount will be given to the borrower.
What to do if you default on your home loan:-
- Restructuring of loans
If you are unable to pay the EMIs on time due to emergencies like medical emergency or job loss, then it is advised to talk to your lender for a restructuring of your loans. Try and convince the lender by producing the documents which show that you been paying the past EMIs on time. You can also pay other credit-related documents which shows your good credit history. Lenders may restructure your loan after evaluating your documents and circumstances. A borrower might even get some time to resume the EMI payments.
- Increase loan tenure
Increasing your loan tenure is the best option to avoid default on the home loan interest rate. Generally, lenders extend the loan tenure if the borrower is not able to make the EMI payments because of an increase in interest rate. Also, this is only possible when your present home loan tenure does not extend your retirement age. Extending loan tenure will bring the cost of EMI significantly.
- Dig into your savings
A borrower might be facing a regular cashflow problem, but there could be chances that he/she has sufficient savings, investments in fixed deposits, equity and mutual funds. It is advised to pay the loan amount from the savings and save the collateral from selling. Also, a borrower should plan for a contingency fund for 3-4 months before they apply for a home, to ignore such conditions.
- Lastly, dispose of the property
If none of the above-mentioned options is not working in your favour then you should sell off the property or any other asset yourself instead of a lender. This way, you can get a better price of the property. Even if the property is sold at a discount of 10%-20%, you can repay the amount. Generally, when you sell the property yourself, you are in profit as according to the guidelines, in India loan to value ratio is 70%-80% or even lower. If after selling the property you are left with a good amount than you can move into an area which is available at a relatively cheaper.
Bottom line: Though sometimes there are situations where a person is helpless and cannot pay the loan amount on time but it is a good idea to create a contingency fund for 3-4 months before availing any kind of a loan. Even if you default the loan after having contingency funds, then you must try the above-discussed options.