What happens when you are unable to pay your home loan?

An Indian middle-class person with a regular income can barely afford to buy a property and has to rely heavily on loans to finance it. Many of us have taken out a home loan for our dream home. Home loans are securitized, which means that your property will remain the lender’s until you return the entire loan amount. The easy access to home loans coupled with tax benefits provided by the government has been the cherry on the cake for home loan applicants.

The ongoing pandemic, however, has made it difficult for everyone to survive physically and financially. Even though a home loan provides you with a roof over your head, it can quickly become a nightmare if not planned and executed appropriately.

Before you think about defaulting on your home loan repayment, it is necessary to know the consequences that follow.

Consequences of defaulting on a home loan?

1. Degradation of your credit score

• What is a credit score?

You can think of a credit score as a mark of your credibility, displaying your past performance with loans and borrowings. To determine your credit score, lenders share information with credit reporting agencies such as CIBIL, Experian, CRIF, and Equifax.

Your credit score is impacted even if you are just a few days late on repayment. When the default exceeds 30 days, however, a material impact on credit score will appear.

• How does a low credit score affect you?

Finding a new loan, funding requirement, and, in some cases, a rented property can be complex. A credit score is a factor taken into account by insurance companies when calculating your premium.

2. Legal recourse sought after by the lender

In the event, a secured creditor is owed money by a borrower under a contract, and the borrower fails to repay any installment thereof, and his account has been classified by the secured creditor as an NPA (i.e., a loan or advance for which the principal or interest payment remained overdue for a period of 90 days), the lender may require the borrower to pay his dues in full within 60 days.

Failing to reply will provide the lender with the following recourse to recover his debt:

1. Taking possession of the assets held as security.
2. Management of the borrower’s business in relation to the security of the debt.
3. Appointing a person to manage the business of the borrower
4. Require a notice in writing for payments received by the borrower from a third party.

For e.g., In the case of a default on a home loan, the lender will auction the property to recover the loan amount and damages.

3. Loss of reputation due to visits by lender’s executive

When you default on your home loan payments despite repeated reminders, your lender’s executives will show up at your door. Your reputation as a person will suffer as a result of this embarrassing scene at your home.

How can you avoid home loan defaults?

People, in general, tend to avoid communication as soon as they anticipate a loan payment default. That is where things head downhill from. Before you commit a home loan default, there are a few methods you can employ. As a borrower, you may want to consider these options:

1. Be more aware of your finances

Keeping your finances in check is essential when paying off a home loan. Keeping a budget, planning for the future, and regularly saving should be a monthly habit for you to avoid defaulting on your mortgage.

2. Request for a lower EMI

If you expect to fall behind on a home loan payment, inform your bank and ask for a decreased EMI. You can convince your home loan provider of reduced EMIs by exhibiting your past track records along with reasons for difficulties faced in repayment. Depending on the size of the loan and credit score, the bank may extend the loan period to reduce EMIs. A restructuring like this will allow you to manage future payments better while saving the lender from the risk of an NPA.

3. Appeal for partial payments

Another effective way to reduce EMI payments and interest rates is to pay them in part. By doing so, you can pay off the loan entirely in EMIs. It’s an option to make partial payments when you have an active home loan and surplus funds remaining after taxes.

4. Request for a moratorium period

When your income is interrupted, you may approach your bank and ask for a break from EMI payments. Banks, for the most part, honor requests from customers when they lose jobs or temporarily cease to do business. For three to six months, the bank typically waives EMI payments. After that, you must resume payments.

5. Alternate ways to fund repayment

When you are facing the problem of lack of cash flow, however, you have sufficient investments in bank fixed deposits, mutual funds, equity, and other asset classes, you can consider liquidating these investments to repay the banks and avoid your dream house going out of your hands.

Conclusion

An essential part of the process is communication. If there is an expectation of delay, you must inform your lender. By avoiding phone calls and shutting yourself off, you are digging an even deeper grave. A lack of communication can result in your dream home being seized by the home loan provider. Rather set a reasonable timeframe for when you will pay the lender. When informed, coercive measures will not be taken by the lender.

According to the final verdict, home loan defaults not only waste your time and money but can also damage the reputation and credibility you spent years developing. Before defaulting on your home loan, you should consider the above points as a vigilant borrower.