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Loans - What to do if you can't pay your home loan EMI

29 Mar 2013

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Buying a house is the most expensive purchase you are likely to make, so you may need help in funding it in the form of a loan. What if you take a home loan, but after some time, find yourself unable to pay the EMIs? There could be several reasons for this, from losing your job to depleting your savings for a medical exigency. Will the bank seize your property if you miss 2-3 mortgage payments? No, not immediately, but if you continue to default for six months, the bank will take over your house.

Lenders are willing to negotiate

Attaching a property is the last thing a lender wants to do. Though banks have the power to enforce the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) to recover non-performing assets without the intervention of a court of law, this is the last step they prefer to take. A bank usually lets one mortgage payment default slip by, but for the next one, it will mail you a reminder to inform you that your payments are late. After three defaults, the bank will send a demand notice, asking you to pay your dues as soon as possible.

"If the borrower doesn’t respond to any of the mails, the bank sends a legal notice through its legal department," says VN Kulkarni, chief counsellor at Abhay Credit Counselling Centre, which is sponsored by the Bank of India. A bank waits for three months before declaring an asset a non-performing one. "After the end of this period, the bank can officially term the home loan an NPA and start the process of recovering the property through the SARFAESI Act," says Kulkarni. Even after invoking the Act, the bank gives the borrower a 2-month notice period to repay the dues.

"Finally, five months after the first default, the bank sends a notice, stating that it has valued the property for a certain sum and that it will auction the house on a particular date. This is usually set for a month from the date that the bank mails you the auction notice," adds Kulkarni.

Steps to take if you miss

EMIs Says Pankaaj Maalde, head, financial planning, Apnapaisa.com: "Banks and financial institutions are more interested in recovering the money than in starting legal proceedings as the procedure of attaching and auctioning a house is lengthy and takes time. So, they will pursue the matter for at least six months before taking legal action." The last stage is usually when a borrower gets a notice from the Debt Recovery Tribunal (for loan amounts of more than Rs 10 lakh). It is compulsory for you to attend the hearing that is set by the tribunal, where you can reach an agreement with the bank. If you are serious about paying your dues and have a good repayment track record, the bank will be willing to offer a leeway.

The first step that the bank takes is to understand the reason for the default since a home loan is a secured one, with the bank having more control over the asset. "If a bank is satisfied that the problem is genuine and that the borrower will start paying the EMI soon, it will be willing to wait for some more time. However, banks take such decisions on a case-to-case basis," says Maalde. Adds Rajiv Raj, director of CreditVidya: "Most lenders take a practical view of the situation and understand how critical the house is for the individual. So they will closely interact with the borrower to understand the reason for the financial hardship."

In fact, a bank will allow you to reclaim your property even after it has seized it, though this has to be done before the auction takes place. Says Kulkarni: "Even if the auction date has been announced, the borrower can come in at any stage and pay the dues to save his property. However, if the bank has incurred any charges for announcing the auction, the borrower will have to pay these."

What are your options?

If you’ve lost your job, but are confident of getting a new one within six months, you can ask the bank to offer you a moratorium for this period. However, if your finances are strained due to some other reason, such as the EMI going up because of a hike in interest rates or increase in personal expenses, ask the bank to restructure your loan. To either reduce the EMI or keep it at the same level despite a higher interest rate, you could increase the loan tenure.

If you have taken an insurance product, which also provides a cover for loss of job, the insurance company will take care of the EMIs for three months from the date that you lost your job. For instance, ICICIBSE -1.50 % Lombard’s Secure Mind Health plan provides a cover for nine major medical illnesses and procedures, death and permanent total disability due to accident and loss of job. Under the plan, the insurer will pay three EMIs on any loan that you have taken if you lose your job. The hitch is that the job loss should be due to retrenchment, layoff or health reasons, and not because you were fired. Also, though you can take a cover equivalent to your outstanding loan amount, the policy tenure is only five years. The main reason you need to start paying the EMI again, other than avoiding possession of your home by the bank, is to ensure that your credit score is not adversely affected.

About 30% of your credit score is based on repayment history and a significant part of this usually depends on how regularly you repay your home loan, if you have taken one. Even one or two missed payments can negatively impact your credit score, and a continuous default will dent it severely, making it difficult to get loans or credit cards in the future. Since this is a dire circumstance, you could dip into your savings and retirement kitty and redeem your investments to pay the EMIs.

However, if it seems that the situation may not improve even after six months, a better idea may be to sell the property. You can talk to the bank about this and use the sale proceeds to prepay the loan. However, ensure that while the sale negotiations are on, you continue paying the EMIs. This will prove to the bank that you aren’t taking it for a ride and will ensure that your credit score doesn’t dip.

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Loans - What to do if you can't pay your home loan EMI

29 Mar 2013

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