Owning a house is a dream for an average person. One can generally not own a house without borrowing either from friends and relatives or by taking home loan specially in metro cities. While buying the house, specially the first house, a person stretches himself financially and exhausts all his savings. Moreover he also avails the maximum possible home loan so as to be able to buy the best house possible with his available resources. Initially the monthly budget of first time home buyers is very tight after payment of the EMI and the family lives on monthly basis on each salary without any savings. The borrower may default on the home loan due to any sudden reason like loss of job or prolonged illness. What are the consequences of default on home loan and what are the options available to you in such a situation. Let us discuss.
Implications of failure to pay the EMI
As per the RBI guidelines in case the home loan instalments are overdue for more than 90 days, the entire home loan becomes a non performing asset and the bank may ask you to repay the whole of the home loan amount outstanding. It is only continuous failure to apy your EMI, which constitutes a default. Mere isolated cases of default in payment of your home loan instalment is not taken so seriously and make you a defaulter liable for severe consequences.
What the bank can do and does ?
In order to protect the interest of the lenders, a legislation called SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act) was passed by the parliament in 2002. This law gives the lender institution to seize and sell the mortgaged property to recover the outstanding loan amount due to it. However in effect the banks do not resort to such extreme steps immediately, on happening of such default. As banks are not in the business of buying and selling properties, so as a lender they are only interested in timely servicing of their loan, they would try all other feasible alternatives before actually selling the house.
In case the bank has to ultimately resort to seizing and selling the property ultimately, this may not be an end of the problems for you as borrower. In case the amount realised from sale of the property is more than the outstanding amount of the loan, the bank shall hand over the excess amount to you. However in case there is a shortfall , you are bound to pay the shortfall to the bank. Moreover you may have to pay capital gains tax also, depending on the period for which the property was held by you and the cost of the property. In case the property is disposed off within 36 months from the its acquisition, any surplus realised over its cost shall be treated as short term capital gains and taxed at the slab rate applicable to you. In case the property is sold after three years, you will be able to take the benefit of indexation of the cost and avail the exemption under [Section 54] and [Section 54EC] by investing the capital gains in another house property or in bonds of NHAI or REC.
Please note that in case the house is sold within a period of five years from end of the year in which the home loan was availed, all the benefits availed by you earlier, under [Section 80C for repayment of the principal component], shall be reversed and taxed as your income of the year in which the property is disposed off by the bank.
Impact on your credit score
Since as per the provisions of Credit Information Companies (Regulation) Act, 2005 all the financial institutions are required to report the transactions of credit including default to the Credit Information Bureau like [CIBIL], your default on the home loan also gets reported. This adversely impacts your credit history and [credit score]. This adverse impact due to default on your home loan, will adversely impact your ability to avail any credit facility from the Financial system, whether in the form of credit card or home loan.
How should you deal with it?
Since the banks have been authorised to take possession of the house legally, it is advisable for you not to confront the lender or its representative. On the contrary you should be cordial with the representative. Your cordial approach will make the representative have sympathetic view of your situation and may most probably come to your help as the bank is also interested in finding a viable solution to avoid litigation or hassle of having to go through the process of seizing and selling the property.
What are the options left with you:
Restructuring of the loan: In case you feel that the problem of not being able to service your home loan is just temporary due to reasons like sudden job loss, or an illness due to accident etc, you can approach the bank with relevant documents to prove that the problem is temporary only and you will be able to come over it soon and service the home loan as usual. You should also produce relevant documents to prove that your record of servicing the ongoing home loan and any other credit facility has been good in the past to convince the lender about your intention and ability to service the loan. Based on the evaluation of the circumstance, the bank may reschedule your home loan. This may include some time for you to resume payment of regular EMIs.
Part payment to reduce the EMI: In case your earnings have gone down or the amount of EMI has gone up due to reasons like hike in interest rates, which makes it difficult for you to pay the EMI month after month, you can approach your lender to extend the loan tenure so that the amount of your EMI comes down within the range which you can service. This facility of extension of loan tenure may not be available in case your present home loan tenure already extends upto your retirement age. You are lucky if you are younger and are able to get the tenure extended.
Liquidating your investments: In case you are facing the problem of regular cash inflow but have sufficient investments like bank FD, investments in Mutual Funds and shares, you can evaluate the option of liquidating the investments and pay off the banks and save your dream house going out of your hand.
Disposing off the property yourself: If you feel that no viable alternative is workable for you but to dispose off the property, please discuss the matter with the bank officials and arrange for sale of the property yourself rather than getting it sold by the bank so as to ensure that you get the maximum price possible. In case the after discharging the bank liability, you are still left with reasonably good amount, you can think of moving into a smaller house or to a house in fathers place in the city where you can get residential property at relatively cheaper price in case your present house is in prime locality.
From the above discussion it becomes clear that defaulting on your home loan is very serious matter and one should be very careful in ensuring property and regular servicing of the home loan.[Read More Post by Balwant Jain]
(The author is a CA, CS and CFP. He can be reached at jainbalwant at gmail.com and @jainbalwant)