A home loan is a long term commitment. Borrowers could be faced with hardships making it difficult for them to repay the home loan on time. What happens in such cases? What kind of action will the bank initiate on home loan defaulters? What are the consequences of not repaying your home loan on time?
Consequences of not repaying your home loan on time
Banks and NBFCs lend up to 80% of your property cost. With the cost of homes skyrocketing, it is not possible to purchase a house without taking a home loan. Recent years have seen a drastic decrease in the home loan interest rates and processing charges. That clubbed with the added advantage of tax benefits has made home loans easily accessible to the public.
Though home loans are attractive and make it easy to buy a home, the loan could also become a burden when you are unable to pay back the loan, as this is a long-term liability and anything can happen, like the borrower losing their job, or have an unexpected medical emergency, due to which you are not able to pay your home loan EMI.
Now we need to ask ourselves what will happen if we cannot repay the loan EMI? As mentioned before home loans are long term loans which with most banks loans have a maximum tenure of 30 years.
If the borrower does not pay the EMI for say 3 consecutive months, the bank could look to repossess your property. What you need to understand is that banks do not want to undergo the cumbersome process of repossessing the house and auctioning it. That is why they have a set of processes that they will do before coming to the extreme case of repossessing the home.
Additional Reading : What are your rights if you cannot repay a loan?
What will the bank do if you are unable to repay your home loan?
As mentioned above the bank will initiate action only after 3 months of non-repayment of your EMI. After the second month default, the bank will send the borrower a reminder letter to pay the loan. Only after the third default does the bank have the right to enforce “The Securitization And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act 2002”, to auction the home.
Again, the bank will send a legal notice asking the borrower to pay the loan amount. If the borrower does not repay even after this, they will send another letter detailing how much they have valued the property and when they are going to auction the home, which will be set after 1 month of the notice.
As you can see, the bank gives the borrower up to 6 months before auctioning the property. This time can be utilized by the borrower to meet the bank officials to solve the issue.
Additional Reading : What is a good CIBIL™ Score for Home Loan?
Steps to be taken by the borrower
Do not panic! You have not paid your dues and now you have letters from the bank saying that they will be forced to take legal action. So get your papers and documents in order. This should contain details like your loan amount, the tenure, interest rate, monthly EMI, a record of EMIs previously paid etc.
Once you have this, contact your bank. They will be ready to listen and help you in any way possible as mentioned above. It is a long and costly affair for them too.
Ask for a grace period. Ask the bank for a grace period stating that you have been paying your EMIs regularly but due to said reason like loss of a job or any other valid reason, you are unable to pay your loans. Your preparation of all the documents and statements will help you here. The bank may consider your situation seeing that you are a genuine borrower and might grant you the grace period with some penalty.
Look at your options. Discuss with the bank the options to pay back your loan. You could think about refinancing your loan. This is the case where the bank can increase the tenure to bring down your EMIs. This is for the situation where the interest might have gone up making it difficult for you to repay the loan. Another option is to try and liquidate assets to pay off your debts. Liquidating shares, fixed deposits, etc., so that you can pay off your debt. You could at least pay in part to give yourself some breathing space to normalize financially
Additional Reading : Top 7 Home Loan Repayment Options Available to Homeowners
Don’t Panic - Work out what needs to be done next
Missing your payments on EMI is not the end of the world. However, it is always better to negotiate with the bank and pay off the debts or come to an agreement than having a defaulter status on your credit report which will prevent you from getting any more loans. Banks are there to help you as they are affected as much as you are if you do not pay your debts.
Take your time, control your spending and pay off your debts.
- Can I go to jail if I don’t repay my home loan?
Non-repayment of loan dues is only a civil offence. Though legal action is seldom initiated against defaulters, you can resolve it by talking to the banker and paying off the home loan.
- Will there be any legal action if I just miss one EMI due?
No, there will not be any. You might have to bear late payment charges and that’s it. Action will be initiated only if you have not made any payment for more than 90 days.
- What is the credit score required to get the best loan terms?
A credit score of 700 and above is considered favorable to get the best interest rates and other loan terms.
- How does one pay the home loan EMI amount?
Home Loan EMI amount is generally auto-debited from your account through the NACH mandate.
- What are the components of my home loan EMI?
Your home loan EMI amount consists of the interest component and the principal component.