How to handle home loan defaults; if you cannot pay EMI

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Santosh had been quite regular with home loan EMI payments for the last three years. However, paying for his father's sudden medical requirements drained off his balance leading to a couple of EMIs being defaulted upon. Once his initial worries about his father's health were over, Santosh asked the bank what his options were with regard to his skipped EMI payment. He was relieved to receive an extension.

If you have missed your EMI for any reason then do not panic as it is not the end, you still have an option, even if it costs you a little more. Of course, the real challenge will be to adjust your funds.

Options for Loan Adjustment

If you have a good track record, then the bank will be willing to make some adjustments to help you manage your default payment easily by either extending your loan term or reducing your EMI. There are numerous solutions available:

* Reschedule your loan term: If after analysing your situation, the bank feels that your EMI amount is high, they might consider rescheduling your loan tenure by extending it. Your monthly EMI commitment would be reduced, which of course means more interest paid. However, it also means some immediate relief and you can always renegotiate with the bank to raise your EMI when your financial position is better. This is more feasible than paying the pre-payment penalty at the end of the loan tenure.

* Deferring payment: You may ask the bank to defer your EMI for a certain amount of time if you are expecting some rise in the cash flow from a job change or maturity of some funds. The bank may permit this, but it will charge you a penalty if you do not make the payment within the stipulated time period.

* Restructuring the loan: Banks have the provision for restructuring housing loans by extending the loan tenure under genuine default circumstances under RBI's policy guidelines.

Sourcing Funds

Even before you go to the bank for negotiations, it would be better to reconsider your sources of funds so that you can discuss your options accordingly. Once you have agreed upon the alternatives with the bank, start working out your cash flow to meet the EMI requirements. If you will be making a one-time payment for settlement, then the adjustment of funds must be made accordingly.

Repossession & Auction

If you are unable to cope with your EMIs and there is no other alternative left, the loan will be classified as a Non performing Asset (NPA) by the bank as per the RBI guidelines and a notice will be sent to you under Section 13(2) of the SARFAESI Act.

The guidelines state that:

The customer will be allowed 60 days to regularise the account or to settle the account post-issuance of the notice.

* On the refusal of the borrower to pay, then the authorised officer can hand over the demand possession notice and ask for physical possession of the property.

* The bank can proceed to auction the property 30 days after taking possession of the property if the customer does not come forward to repay the loan. The bank shall send a letter to the customer informing them about the auction date and time.

* The bank will consider handing over the property back to the customer after possession at any time before concluding the sale transaction of the property if they clear all bank dues.

* Any proceeds over and above the bank dues from the auction will be returned to the borrower.

A Word of Caution

The SARFAESI Act gives the customer the right to appeal against repossession taken by the bank under the Debt Recovery Tribunal within 45 days from the date the action is taken.

Loan default can result in seizure and auction of your assets, affecting your credit history. Even late payment, rescheduling your loan can affect your chances of obtaining a loan in the future. So, it is better to plan for such eventualities when you take the loan in the first place. However, if you are a victim of unforeseeable circumstances, the best you can do is to have a backup plan.

Adhil Shetty — CEO, BankBazaar.com
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