Given the steep property prices, it is almost inevitable to follow the Home loan route when purchasing residential property. While it may seem like a prudent choice at first, one must also remember that a Home loan is also a financial commitment. During the long duration of the tenure, unforeseen circumstances may arise which may lead to mortgage default. If a health issue or a job loss leads to inability in paying Home Loan EMIs there a few ways one can deal with the situation at hand as we will explore later here.
What is a mortgage default?
A loan agreement dictates that a borrower must pay a fixed amount of money to the lender every month. If a borrower is unable to keep this financial and legal agreement then we have a loan default. Ideally, banks do not press foreclosure for when you default one EMI payment. However, if you continue to default consecutive payments, for instance, till 3 months then there is an increasing probability that the bank will seize your assets.
As per RBI guidelines, a mortgage default occurs when a borrower is 90 days or more behind in making a payment on their home loan.
Repercussions of a Mortgage Default
In such scenarios, legislation called SARFARESI comes into the picture. SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act) lays down a detailed framework by which the secured creditors can insulate assets, seize and sell the mortgaged property to recover the pending loan amount.
Pragmatically, the banks only resort to this if there is no other viable alternative. Since banks are not in the business of properties, their propensity too is to try and resolve the issue without taking such severe measures.
Impact on Credit Score
Your default on home loan will get reported just like CIBIL. This leads to a negative impact wherein your credit score is adversely affected. This further impacts your ability to avail any credit facility from the financial system.
What are your Options:
- Grace Period
You can request the bank to grant you a grace period stating that you have previously paid your loans on time but are unable to pay now due to a sudden situation like job loss, temporary illness, etc. An effective statement and presentation of documents might prove advantageous and the bank might consider a grace period with some penalty.
- Cash Crunch
If you have substantial investments in mutual funds, fixed bank deposits or other sources of immediate cash, you can consider liquidating these and pay off the bank.
- Loan Restructuring
If you feel that the problem is only temporary and it will resolve over time you can ask the bank to restructure your loan. Again, it is imperative that you provide relevant documents and prove your case to the bank that you are a genuine borrower and that you will be able to pay the loan if a restructuring is done.
- Reduced EMI with Partial Payments
In cases where your income has fallen or the EMI rates have hiked and you are unable to meet them, you can request the bank to reduce the EMI amount meanwhile extending the tenure. This is more likely to work if you are young and the loan doesn’t already extend to the retirement age.
- Disposing of the Property Yourself
To ensure the maximum price possible it is advisable to sell the property yourself and cooperate with the bank after you have exhausted all the other options. In case, after selling the property, you are still left with a good amount, it can come in handy for your personal use.
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