What are your options if you default on your home loan EMIs?

Retrenchment, an accident, a prolonged illness or business losses, can all lead to a situation where a borrower is unable to pay his home loan EMIs. Here are a borrower’s options in such a situation:

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Plan a contingency fund

Before you take a home loan, financial planners suggest you prepare a contingency fund amounting to at least six months’ expenses. This will help you tide over a temporary cash crunch. You may also buy insurance against unemployment. In India, such a policy is sold as a rider and not as a standalone policy and could pay 3-6 months’ EMI in case of a job loss.

How lenient are banks for defaults in EMI?

Contrary to popular belief, your bank may not be very lenient if you default on your home loan EMIs. “The bank may overlook non-payment for a month or two, thereafter, it will invoke The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act 2002) and go after the collateral,” states Arun Ramamurthy, co-founder, Credit Sudhaar, a credit health management company.

A bank’s adopts a lenient approach in very rare circumstances. For instance, when the property title is not clean, in which case the bank may have problems repossessing the flat. There is also the situation where the loan outstanding is small and selling the property may not be worth the trouble. Banks are more amenable to restructuring an unsecured loan, such as a credit card loan. In case of a secured loan, they have the option to repossess the collateral. Banks also have to follow strict provisioning norms for home loans. The amount involved is also large. Due to all these reasons, they are inclined to deal strictly with defaults. In the less likely event of restructuring, the bank could reduce your EMI and increase your tenure.

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Temporary cash crunch

In such a case, break a fixed deposit or take a loan against a security. The borrower could also take an unsecured loan, such as a personal loan. “Though high-cost, a person may exercise this option for the short-term if he is certain of getting cash flows from another source, in the near future,” explains Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Options if you can’t pay up

If the borrower realises that he will not be able to pay his EMIs, he should try to sell off the apartment himself. Even if he has to sell the property at a 10-15% discount, he will be able to repay the loan. Typically in India, the loan to value (LTV) ratio is 70-80% or even lower. This means that if the cost of the apartment is Rs 100, banks do not lend you beyond Rs 70-80. If the borrower hands over the property to the bank, the latter could take a lot of time in liquidating it. The price obtained at an auction may also be much lower than the market rate. The borrower should inform the bank about his decision to sell the property. In such a case, the bank may grant him 2-3 months. In a bearish market like the current one, the owner must act quickly before prices decline further.

Credit score is impacted by EMI defaults

In case of a complete default or restructuring of the loan, the borrower’s credit score takes a big hit. “In the list of sins that you can commit on the loan side, defaulting on a secured loan is right at the top,” warns Ramamurthy. “The weightage given to a secured loan is high in calculating credit score.” If the loan gets restructured, the impact on the credit score is slightly less. However, if there is a default, the impact is drastic. The person may be shut out of the credit market entirely and not be able to obtain any form of loan in the future.

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