The ongoing economic turmoil caused by the novel Coronavirus pandemic in India has resulted in increased home loan EMI payments failure, forcing banks to resort to other recovery processes. One of these is the complex and distressing process of property foreclosure, where the bank may sell the property in an open market to recover what the borrower owes them.
This article will help you understand the process of property foreclosure and what it means for you.
See also: What is EMI and how is it calculated?
What is property foreclosure?
The basic concept of foreclosure is pretty simple to understand. The Oxford Dictionary defines a foreclosure as the process under which ‘one takes control of somebody’s property, because they have not paid back money that they borrowed to buy it’.
Every home loan agreement has a clause that gives the lender the right to repossess your property and sell it, if the EMI default period exceeds six months.
Typically, banks start to send notices about property seizures after three missed EMI payments. They give the borrower 60 days to raise an objection. If the borrower fails to do so, they start the property repossession and foreclosure process.
Advertisements are published about the foreclosed property in leading newspapers, inviting bids with a minimum reserve price. Notices of the sale are also made public on the official portal of the bank and its social media accounts. Following this, the bank conducts a foreclosure auction of the property in an open market, to recover the outstanding amount.
When does a bank start property foreclosure?
A wrongly held notion about property foreclosure is that banks are eager to start the property foreclosure process, if the borrower fails to pay the EMIs on time. While it is true that a lender would go all the way to recover what an individual owes it, property foreclosure is never its first choice. When you default on your home loan EMI payment for the first time, banks would simply levy a penalty. It is only when the default continues for three months that they get cautious and start sending notices. If the default continues for six months that is when property foreclosure is initiated.
It is important to note here that repossessing properties and selling them through auctions is a complex and time-consuming process that requires due diligence along with significant monetary expenses. In fact, the cost of foreclosure is so high and the process so complicated that most banks in India hire third-party agencies to complete the process. That is why banks are never keen on launching the property foreclosure process, unless it is absolutely necessary.
Also read: What to do in case of home loan default
How to avoid a property foreclosure?
One of the biggest mistakes borrowers make, is to avoid the lender in times of monetary distress. Communicating with your bank is crucial to avoid property foreclosure, even if you are not able to pay your home loan EMIs temporarily. Any financial expert would tell you that you must inform your bank of any reason that may prevent you from making timely EMI payments. Even though the bank may continue to charge a penalty, it would be in your interest for the bank to understand that the situation is temporary and you intend to make complete payment in future.
However, merely stating your good intentions will not be enough. Your repayment history and previous interactions with the bank will act as proof for the bank to be convinced and lend you a helping hand in time of need. Therefore, it is important to maintain a good credit score and relation with the bank at all times.
Should you buy a foreclosed property?
As is true of all propositions, there are pros and cons to investing in a foreclosed property. Since the bank is in a hurry to offload the property and recover its money, such property is often sold at less than its market value, making it an attractive option for buyers.
However, the new owner will become responsible for all the legal, financial and most importantly, physical burdens associated with the foreclosed property. He/she will have to pay pending utility bills and vacate the property if the previous owner or his tenant refused to move out. It only makes sense to invest in foreclosed properties if they are valued at such a rate that the buyer does not mind the additional responsibilities associated with the purchase.
Another area of concern would be housing finance. If you plan to get a home loan for the purchase of a foreclosed property, you will find it difficult to find lenders willing to oblige. Typically, the deal would have to be closed using your finances.
FAQs about property foreclosure
How long does property foreclosure take?
Banks in India typically start the property foreclosure process if the default continues for more than six months. Banks might offer you some leeway here if you can satisfy your lender that you will be able to take care of your loan in future. That will, however, be done purely on a case-to-case basis.
What documents are needed for property foreclose?
The bank will have to provide documentary proof that the borrower has defaulted on the loan for a prolonged period and will not be able to settle his loan in the foreseeable future, to launch property foreclosure. It will have to produce the notices sent to the defaulter, evidence of missed EMIs, and all the details about the borrower’s outstanding loan liability.
Who pays the cost of property foreclosure?
Initially, the bank will pay the cost of property foreclosure. After foreclosure, the cost of property foreclosure is deducted from the amount the property sale fetches. If the bank can sell the property for an amount more than that owed by the borrower, it will deduct the cost of property foreclosure from the excess amount. Whatever is left - if any - will be given to the borrower.
What about a tenant living in a property set for a foreclosure?
For as long as the foreclosure process is on, this tenant might not be forced to move out of the rented accommodation. However, once the foreclosed property is sold to another person, the tenant may continue to live there or be evicted as per the decision made by the new owner.
An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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