Buying a home is not a piece of cake unless you are born with a silver spoon in your mouth. Let’s face it! Homebuyers have to stock up on a lifetime of savings which in most cases are not enough to meet the humongous cost of a property.
Though real estate developers come up with attractive payment plans to ease the financial stress of home buying, the spectre of a home loan looms large over most homebuyers.
Home loans usually come with a long repayment tenor of 10 to 20 years. However, it is difficult for a borrower to predict his financial position for such a long period of time. Unforeseen events such as the recent coronavirus pandemic can snatch away steady income sources and put the borrower in the lurch where he is unable to pay his home loan instalment.
Defaulting on loan repayments can invite bounce charges as well as an extra interest in the form of penalties. Worst, you can slip into a spiral of debt when you fail to repay the monthly loan instalment amount. Well, the thoughts of being branded as a criminal and further consequences may put you in a cold sweat.
The good news is defaulting on loan repayments is not the end of the world and you can avoid the probability of your property getting seized by the bank. There are certain rights that can safeguard loan defaulters to some extent.
When is a loan considered to be in default?
Home loans are repaid by borrowers in equated monthly instalments (EMIs). A bank considers a home loan to be in default when the borrower fails to repay an instalment for a period of 90 days after the last payment has been done. In clear terms, the borrower has missed EMI payments for a period of 3 months.
Does a home loan default mean that you lose complete ownership of the property?
Absolutely No!! Banks are bound by a set of rules with regards to extracting the loan amount from the borrower. They do not hound or pounce upon the borrower for missing EMI payments.
The bank sends a notice to the borrower reminding him that his EMI payments have been missed and that strict action can be taken until he meets his loan obligations. Banks are generally considerate if the borrower comes up with genuine reasons for non-payment of loans.
Depending upon the genuinity of the reason, the bank looks for feasible solutions that are acceptable by both the borrower and the bank.
The options are as follows:
- Rescheduling the loan: If the bank feels that the loan amount is wrecking your personal finances, then it will reschedule the loan by extending the loan tenure. Though it will cut down the monthly EMI expenditure, the overall interest may inflate in the long term. However, when better times prevail, the borrower can return to its previous EMI.
- Postpone the payment: If the cash flow is curtailed for some time due to loss of job of the borrower, the borrower can request the bank to give him temporary relief from loan repayment. The bank may permit the same but levy a penalty for dishonouring the agreed repayment time schedule.
- One-time settlement: Banks sometimes give this option of repaying the entire debt at one go when you have surplus money. The bank waives off a part of the loan amount and asks you to pay the settlement amount at one stroke.
What happens if the above options fail to materialize?
If the bank considers the home loan as a Non-Performing Asset (NPA), then he can start his proceedings under the SARFAESI Act.
- The bank will send a 60 days’ notice to the borrower reminding him about his non-payment of debt and to come forward to settle the amount.
- If the borrower refuses to oblige, an authorized offer will hand over a demand possession notice to the borrower and ask for physical possession of the mortgaged property.
- The auction of the property will be done by the bank after 30 days of taking over the property. The borrower can resolve the matter within this period and pay off the loan to get back the property.
- After recovering the dues, if the bank obtains any excess amount from the sale of the property, it will refund back to the borrower.
What are the rights that can be exercised by the borrower in case of loan default?
Right to notice: The bank can’t take immediate action against the borrower if he fails hasn’t paid EMIs for a period of 90 days. The bank has to serve a notice of 60 days to the borrower. If the debt is not settled within the time period, the bank will take over the property. However, before selling off the property, the bank will have to serve another one-month notice period and inform the defaulter of the same.
Right to object: The defaulter can raise objections towards selling off the property by the bank within the one-month notice period. The loan officer must honour the objection and furnish proper reasons for squashing your objection within a period of seven days.
Right to fair value: Upon seizure of the property, the bank cannot decide the selling price of the property. The bank has to send the owner of the property a fair value notice along with the one-month notice stating the sale price of the property. However, if the borrower finds the stated selling price to be less, he can raise an objection and quote a price that he thinks is reasonable. The bank will have to obey the plea and work out a proper selling price again.
