With the cost of homes skyrocketing, it is not possible to pay the full down payment without taking a loan. With home loans a little easier to get and the added advantage of tax benefits home loan application has increased dramatically.
Though home loans are attractive and makes it easy to buy a home, the loan could also become a burden when you cannot pay back the loan as this is a long-term liability and anything can happen like the borrower losing their job, have a medical emergency due to which you are not able to pay your loan EMI etc.
Now we need to ask ourselves what will happen if you cannot repay the loan EMI as mentioned before home loans are long term loan which with most banks the 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 they have a set of process that they will do before coming to the extreme case of auctioning the home.
What Happens When You Cannot Repay Your Home Loan?
As mentioned above the bank does not disturb the borrower after the first month default. But after the second month default the bank will send the borrower a reminder letter to pay the loan. Only after the third default that the bank has 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 6 months before going for auctioning the property. This time can be utilized by the borrower to meet the bank officials to solve the issue.
Steps to be taken by the borrower
Do not panic! You have not made your dues now you have letters from your bank saying that they will be forced to take legal action. So get your papers or documents in order. This should contain details like Your loan amount, the tenure, interest rate, monthly EMI, record of EMIs previously paid etc.
Once you have this contact your bank. They will be ready to listen and help you in anyway, possible like mentioned above it is also a long and costly affair for them too.
Ask for a grace period. Ask the bank for grace period stating that you have been paying your EMIs regularly but due to said reason like loss of job etc. you are unable to pay your loans. Your preparation of all the documents and statement will help you here. The bank may consider your situation seeing that you are a genuine borrower might grant you the grace period with some penalty.
Look at your options. Discuss with the bank on the options to pay back your loan. You could think about refinancing you 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 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
Missing your payments on EMI is not the end of the world. At the most it will affect your credit score a little bit, but it is better to negotiate with the bank and pay off the debts or come to an agreement than have 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.