What Happens if you Default on your Home Loan in India

 When purchasing your first home, you extend yourself financially and deplete all of your money. You also attempt to obtain the largest feasible house loan in order to purchase the greatest possible property with the available finances. Home loans are long-term obligations with monthly payments that must be made for at least 15-20 years. Your financial responsibilities alter considerably throughout these years, and you may find yourself unable to pay your house loan EMI. Though most lenders would be flexible if they were told of a single default in advance, repeated defaults can have far-reaching consequences. If you skip an EMI, you may be required to pay the difference together with the next month's EMI the following month. 

However, it would not be a big deal if you miss one or two EMI payments due to unforeseen circumstances. In this case, the bank will give a quick warning. If you fail to pay your EMI for three months in a row, it will be considered a red flag. The bank will identify you as defaulters, and you will be notified. Moreover, If you have a strong payment history and acceptable grounds, the lender may allow you a grace period. The default, on the other hand, will have a negative influence on your CIBIL score.

Home Loan Default Consequences

The following are some of the consequences that you might have to face if you default on your home loan in India:

Late Fee

If you default on your home loan, you will be charged late fees, fines, and, in some cases, punitive interest. In most cases, the punitive interest is 1-2 percent of the EMI. As a result, depending on the circumstances, you may be obliged to pay punitive interest on the whole amount outstanding during the default period. This would be in addition to any lender-imposed late fees.

Possession of Collateral 

After three consecutive EMI defaults, banks and financial institutions frequently classify a loan default as a Non-Performing Asset (NPA). As a result, they initiated the debt recovery procedure under the 2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act). You are served with a legal notice and given 60 days to clear your obligations. However, under the SARFAESI Act, banks have the power to confiscate your collateral if you do not pay your bills within 60 days. Your collateral can be seized without a court order under the SARFAESI Act.

Collateral Auction 

If the debt is not paid within 60 days, the bank will send you another notice stating the value of the collateral, whether it is real estate or jewellery, as well as the date of auction. If the collateral is a life insurance policy, it is prematurely ceded to the insurer, with the proceeds going to the lender.

Impact on your CIBIL Score 

Missing even a single EMI payment will reflect on your credit record, decreasing your credit score. A single loan default might reduce your credit score by 50-70 points. This affects not just your credit score, but also your creditworthiness for future borrowing plans. With a low credit score you might not be able to apply for the best home loans as well as the best credit cards in India. Banks view you as a high-risk borrower, lowering your chances of securing a loan. Even if you are granted a loan, it comes with rigorous terms and conditions.

Conclusion

To avoid home loan default, you might request a lower EMI and more efficient financing from your lender. If you have a cash gap, you might approach the lender and seek an EMI-free time. Banks may issue you a three- to six-month EMI payment waiver if you have lost your employment or temporarily ceased company activities. In contrast, the lender has the option of imposing interest on the outstanding loan amount at a later date. Another alternative is to make partial payments to lessen the EMI load. This may be accomplished with the assistance of a house loan overdraft. When you have extra income and an active house loan, making a partial payment to your overdraft account may relieve your financial burden.