Typically, a home loan is a long term commitment. However, sometimes borrowers encounter hardships and financial crises that hinder them from repaying a home loan on time. It is crucial to know what happens if that is the case. Many things can happen, including medical problems, accidents or even job loss, rendering you unable to pay your equated monthly installment (EMI). If that’s the case, there are scenarios you will face from your lender. Here are crucial things you should know:
If you fail to pay your EMI for one or two months, the bank (borrower) will send you a notification. The notification serves as a reminder that you have defaulted on paying the EMI. However, if you fail to pay the EMI for three consecutive months, you will be marked as a non-performing asset (NPA)! This is a serious situation because the bank marks you as a defaulter, and you need to act fast. If you get the bank notification, act fast by replying and explaining your situation. Usually, if you have a good credit score and the reasons for not paying the EMIs are genuine, you can get a grace repayment period.
After being marked a defaulter, the lender sends you a final 60 days notice. The notice is according to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFESI). This Act was enforced in 2002 to empower lenders and banks to recover their money. In the past, recovering borrowed funds was lengthy and daunting, making it hard for lenders to recover their money. However, upon passing the Act, lenders can now evict you from your home and auction it.
The 60 days notice is the final reminder to repay the money you owe to the bank. If you fail to repay the loan within 60 days’ notice, the lender has the right to seize the property and auction it to recover their money. While this might seem far fetched, SARFESI Act empowers lenders to auction residential and commercial properties to recover their borrowed money. It is crucial to understand that you have a chance to explain your case to the assigned officer. If the officer understands your financial crisis, they can help you come up with a way you can pay the EMIs. However, if that fails, you will get a letter of rejection, and after 7 days, the next step of eviction and auction begins. Remember, during the 60 days, recovery agents can show up on your doorstep trying to recover the money. However, you have certain rights as the homeowner. Some of your rights include:
• Asking the collection agents to identify themselves
• Ensure they are authorized by the Indian Institute of Banking and Finance
• They can only visit your home between 7 am and 7 pm.
Also, they should only ask to speak to the defaulter and not other family members
• The agent should be professional and respectful. They should not use objectionable language in their inquiries
If any of the rules mentioned above are not followed, you should complain to your bank or lender.
This is where the auction process starts. The lender will have the property value to determine the amount of money they can get after selling it. The property is advertised in a newspaper with vital details, including the address, date, and time. If the property owner is not contented with the valuation, they have a right to object to the valuation and talk to the bank or lender.
The final step entails auctioning the property in an open market and recovering the loan amount. The main objective of the lender is to recover their money. If there is any excess amount, it will be paid to the homeowner. Since most auctions are done online, homeowners get the data online.
If you are marked a defaulter, the best option is to sell your home and repay the loan. While most homeowners might object to this option, here are the two reasons why selling off your home and repaying the loan is the best option:
• Auction prices are usually low – selling your home might get you a better price, unlike waiting for the bank to auction it. The bank only cares and wants to recover their money. Ergo, they will not look for the best price on the market.
• Auction is a lengthy process – the lender or bank will seize your home and start looking for a potential buyer via an auction. This process might take a lot of time and seem unsuitable, especially if you have a tight timeline. However, if you do it yourself, you can save time by hiring realtors or brokers to speed up the process.
It is possible to avoid being marked as a defaulter, common practices include:
• Ensure your EMI is less than 40% of the cost of your home – avoid taking a massive loan because it will be a burden to pay. Talk to a financial advisor to determine the EMI you can afford if you are looking to borrow a home loan.
• Pay a hefty down payment – if you are in a financial position to pay a significant down payment, do it because it will make it easier for you to pay the loan.
• Loan restructure – sometimes, you might find the EMI an enormous amount after taking the loan. If that’s the case, restructure the loan, increase the tenure and minimize the stress and pressure of paying your loan.
• Repay the loan using any investments you own – if you have invested in insurance policies, PPF, EPF or even a saving account, you can use the money to repay the loan. It is easier to reinvest instead of harming your credit score and getting your home auctioned.
There are numerous ways you can handle your financial distress if you cannot repay your home loan. For example, talking to the relationship manager to discuss the available options is recommended. Finally, you can quickly rebuild your financial health if you prudently manage the situation. Hiring a professional financial advisor is the best option to get the best financial advice.
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