What to do if you have defaulted on a home loan | Economic Times

When the Choudharys bought their dream apartment with a home loan, the future looked bright. Then the pandemic hit and like many homeowners, the Choudharys are now facing financial difficulties after a job loss. Plagued by poor health and resultant high medical bills, they have been struggling to service their home loan EMIs for the past few months. Things are so bad that they wonder if they can ever repay the loan. They are not aware what happens on non-repayment of EMIs. They wonder how many missed EMIs will prompt the lender to take over the flat and throw them out. They want to know what exactly are the steps involved in the foreclosure process and what are their options in this difficult situation. So far their credit history has been very good.Missing one or two EMI payments due to some reason is no big deal. In that case, the bank will sound a small warning. However, if they miss paying the EMI for three consecutive months, then it will be a red flag. The bank will mark them as defaulters and send them a notice. The Choudharys must explain their situation to the bank. With their impeccable credit history and genuine reasons, there is a possibility that the lender may give them the benefit of some grace period. However, their Cibil score will get adversely impacted due to the default.In case the bank decides to name them as defaulters, it will then send a full and final 60 days’ notice under a law called SARFESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act). The Act empowers banks and other financial institutions to directly auction residential or commercial properties that have been pledged with them to recover loans from borrowers and lays down all the processes to be followed. This 60-day period will be the Choudharys’ final chance to repay their outstanding EMIs before the auction. And as the final step, the property will be auctioned in the open market and the bank will recover all its dues. The Choudharys will be entitled to any excess funds received on account of the auction.In case of the unfortunate situation of a default, the best thing for the Choudharys to do would be to sell off their apartment on their own and pay back the dues to the bank. The homeowners typically do not end up getting the benefit of the best price in an auction, as it is usually a distress sale. Also, the auction process is time consuming and may not be suitable for the family.(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)