With any kind of debt, it’s always better to talk about it and arrive at a sensible solution than to keep silent and let the debt build up
Buying a home is not an easy task. Most people have to avail of a bank loan to fund part of their purchase as banks – as a rule – do not sanction loans over 70% of the loan amount. Hence, one needs to save enough to down pay a part of the total proceeds.
A home loan is often the only financially viable method for a person to fund major purchases like a house. It also offers significant tax benefits to borrowers.
For many buyers, home loan equated monthly instalments (EMIs) constitute a significant portion of regular outgoings. So, what happens if you find yourself in a position where you can’t meet your EMIs on a regular basis? This may be on account of a family emergency or a loss of job, among others.
It is important that you do not bury your head in the sand. When you miss out on your EMI payments, the interest will still be added to your overall outstanding balance. This means your loan is likely to get more expensive in the long run.
Rule No. 1: Don’t panic.
There are a number of things you can do to get back on track. It’s important that you do not ignore the issue as it will only make complicate things. If you miss a repayment, your bank will chase this up right away.
Rule No. 2: Contact your bank
If you are unable to pay your EMIs on time, contact your bank as soon as you know you will have trouble meeting the repayment schedule. If you are serious about paying your dues and have a good repayment track record, the bank will be willing to offer you some leeway.
Banks usually interact with the borrower to understand the reason for the default in payments. If a bank is satisfied that the problem is genuine and that the borrower will start paying the EMI soon, it will help by offering to defer the payment.
The bank may extend your home loan term so that your repayments are smaller and more manageable. You also have the option to ask banks to restructure your loan by either reducing the EMI or loan tenure.
Rule No. 3: Seek counselling
One can also seek help of some financial counselling centres. These centres usually provide free service. They assist by analysing their situation, counselling and providing options.
Counselling centres can help you draw up a budget so that you can figure out how to meet your loan payments. They provide advice on how to talk to your lender about your repayments and various options open to you.
Rule No. 4: Draw up a budget
If you wish to skip rule number three, look at your finances and draw up a budget that you will be able to stick to. It is a good idea to adopt this practice even if you are not finding it hard to meet your loan repayments as it will help you gain control over your money.
Start by looking at your financial statements and calculate all your outgoings and income sources. This would help you identify areas in which you could curb spending, thus freeing up funds to meet your EMI obligations. If you are close to losing your home, then stay away from luxuries till your finances are in order again.
See if your insurance policy covers job loss. Some insurers offer policies which take care of your EMIs for three months from the date of losing your job. However, the job loss should be due to a lay-off or health reasons. The policy does not cover termination due to poor performance.
Can the bank posses your home?
If a borrower misses one or two EMIs, the bank won’t possess the property immediately. After three defaults, the bank usually sends across a notice asking the borrower to pay his dues as soon as possible.
If the default continues for six months, banks give the borrower a two month grace period to regularise the repayment. Failure to do so will result in banks declaring the loan a non-performing asset (NPA). It can now auction the property to recover its debt.
What does the law say?
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) allows banks and financial institutions to auction properties -- residential and commercial -- when borrowers fail to repay their loans. It enables banks to reduce their NPAs by adopting measures for recovery.
Although banks have the right to enforce SARFAESI to recover NPAs without the intervention of a court, they choose this as the last resort. Banks are primarily interested in getting their money back than in taking legal recourse. A legal recourse involves attaching and auctioning a house which is time consuming. Hence, banks follow up the matter with borrower for at least six months before taking any legal action.
The auction process
After six months of constant defaults, the bank sends a notice to the borrower. The notice mentions the amount at which the bank has valued the property and the date on which the house will be auctioned. This auction usually takes place a month from the date of the auction notice.
The auction price depends on the market value of the property. Professional valuers determine the property value based on which the bank fixes a minimum bid price. If the price fetched exceeds the bank’s dues, the excess amount is refunded to the borrower.
What if you are able to pay up before the auction?
Even after the bank has seized your house, you still have an option to get back your property. However, this has to be done before the auction takes place. Though the auction date is declared, you can still pay your dues to save your home. Besides, you also have to pay any charges incurred by the bank for announcing the auction.