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Consequences of Defaulting on Your Home Loan EMI and How to Avoid It

Today, it is not surprising to see ads stating that there are loans available for people with low credit scores and even home loan for CIBIL defaulters is entirely possible. However, one of the basic rules you must follow is to never delay or default on your home loan EMIs. After all, a black mark in your credit track record remains black for a long time. Apart from the home loan defaulter legal action that the bank can take, it will also make it tougher for you to get other loans. As an individual, a good credit score and a good credit standing are two invaluable assets.

What if you fall into a cash crunch?

Quite often people fall into a cash crunch due to no fault of theirs. For instance, they may lose their job, sometimes they are laid off at short notice too. Moreover, often people leave a cushy job and start their own business and it fails to take off. You are left saddled with no income and a lot of liabilities. These are times when a default on your existing home loan becomes inevitable, despite your best efforts. What is the first thing to do in such cases? Approach your banker and be honest and transparent about the problem. Hiding from the problem and defaulting on the home loan is definitely a bad idea.

There is a clause in RBI provisions, which permit a moratorium period of 6 months for long-term loans, in the event of a genuine crisis. However, there are specific guidelines and procedures to help the lender and the borrower tide over the crisis. It is important to take the bank into confidence. If you try to evade the problem, then the bank is well within its rights to initiate legal proceedings against you and even repossess the funded property to recover the dues. Let us look at what happens in the event of default.

What does a bank do when you default on home loan?

Typically, banks would try their best to work out a solution so that they do not have to repossess and auction your property. That is the last resort. Here are the options in front of the bank giving the home loan.

  1. The bank normally starts with a notice to the defaulter after they have skipped on two EMIs. This is more like a friendly reminder and, if possible, the borrower must sit with the bank and work out an early solution. Beyond this point, it gets messier.
  2. In the second step, the bank classifies your home loan account as a non-performing asset (NPA). That means; the asset does not generate any earnings. NPA is declared after 3 consecutive EMI defaults by the borrower.
  3. After the loan becomes an NPA, the bank serves the home loan defaulter legal action notice and then gives the borrower up to 2 months to clear the missed EMIs. This is perhaps the last point when you can prevent the house from going for auction. If the bank does not get a satisfactory response to the legal notice, it will go ahead with the property auction.

The entire process takes about 6-7 months, so you have enough time to work out an alternative resolution and avoid the house from going to auction.

Three options to explore to avoid default

It is best to avoid a default. When you default, you still have a window of 6-7 months during which you can recoup the situation and bring things back to normal. How do you handle this phase? There are 3 options.

  • Ask the bank for a grace period. RBI rules permit a moratorium of up to 6 months subject to certain terms and conditions. Apart from seeking grace period, you can also look to restructure the loan in such a way that the current EMIs are reduced and balloon payments are structured later. Be transparent and options open up.
  • You can liquidate some of your investments or your PF balance can be used to pay off the interim dues and then you get back to normalcy. The impacted long-term financial plan can be rebuilt, but in this instance, this may help you survive the day.
  • See if you can leverage assets and get a loan against the same. The loan rates are more reasonable, but you can repay these loans once your condition improves. More importantly, you save your home loan from default and your home from being repossessed.

The real long-term impact of a home loan default is on your CIBIL score and your credit standing. Considering the emotional turbulence, it creates, home loan defaults are best avoided.

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