Saturday, March 30, 2013

Can't Pay Home Loan EMI

Here's how the bank will react to the situation and how you can negotiate with it to resolve it

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 loan. What if you take a home loan, but after some time, find yourself unable to ay 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.

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.

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.

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.

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 persue the matter for at least six months before taking legal action.

The last state is usually when a borrower gets a notice from the Debt Recovery Tribunal (for loan amounts of more than 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 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 the 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. 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. 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.

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.

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. 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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