What Are the Consequences of Defaulting on Home Loan EMIs?

When one avails of a Home Loan, the onus of repayments lies with the borrower. Defaulting on Home Loan EMI payments not only hurts your credit score but also makes it difficult to secure any credit in the future. However, at times, you may face circumstances beyond your control like employment/business setbacks, physical illness, loss of pay, etc. due to which you may be unable to foot the EMIs. In such a situation, the Reserve Bank of India mandates a moratorium period of six months for all term loans; along with specific guidelines and procedures to help both the lender and the borrower tide over the crisis.

What Happens When You Cannot Repay Your Home Loan EMIs?

When notified in advance, most lenders show leniency if you miss a couple of payments. But regular defaults could have far-ranging implications that may even include instituting legal action against Home Loan defaulters in India. Some lenders also extend insurance coverage on their housing loan schemes with the sole objective to mitigate these risks and take care of several EMI pay-outs over the next few months.

The general consequences of housing loan EMI defaults are:

Legal Recourse

Missing out on two EMIs may simply call for a reminder. Beyond that, lenders might serve a legal notice asking for repayments and begin the loan recovery process as per the Securitisation and Reconstruction of Security Interest Act (SARFAESI), 2002.

Non-Performing Asset (NPA)

If you default on three consecutive instalments, lenders may declare the concerned property an NPA, which indicates that the asset does not generate any earnings.

Seizure of Property

Upon serving legal notice, lenders grant you two months to pay the missed EMIs. But if you continue to default, they will issue a notice of auction mentioning the estimated value of the property. A month later, if they still don’t receive your payment, lenders will commence with the auction formalities. This entire process takes about six months which gives you sufficient time to finalise suitable loan settlements with your lender.

Impact on CIBIL Score

Whenever you miss your EMIs, lenders send a negative financial report to credit bureaus. As a result, your CIBIL/credit score takes a hit. Without a good credit score, borrowers cannot obtain favourable loan deals and even if they do, the interest rates could be quite high with stricter loan terms and conditions.  

Also Read: Tips to Help You Improve Your CIBIL Score 

Steps to Take If You Have Defaulted on a Home Loan

The inability to repay loan instalments leaves defaulting borrowers with the following course of action:

Request for a Grace Period

Lenders offer a grace period to borrowers if they are unable to pay the EMIs for genuine reasons. In such cases, one should discuss their monetary situation with the lender providing some evidence and then ask for an appropriate grace period.

Restructure Your Home Loan

You may opt for loan restructuring whereby lenders might reduce the payable EMI sum and extend your loan tenor instead. You can even negotiate for reduced interest rates on the outstanding loan amount to effect easier repayments.

Also Read: Ways Home loan Borrowers Can Reduce Home Loan EMI 

Liquidate Your Investments

This might be a good time to take stock of the assets in your financial portfolios such as bonds, shares, mutual funds, fixed deposits, matured insurance policies, provident funds, etc. Liquidating them can fetch you substantial funds to repay the pending EMIs.

Consolidate Your Debts

You can consider a personal loan to pay off your dues and other debts without hampering your credit score. If you have a good credit report, expect reduced interest rates on a higher loan amount.

Sell Your Property

This should be your last resort for repaying the loan. However, you need the lender’s permission to make a transaction. The main advantage of selling the property yourself is that you get a better price in comparison to the auction sale money raised by the lender.

Rights of Home Loan Defaulters

Lenders can take action on loan defaulters for recovery as per due process, keeping in mind the following rights of defaulters: 

• Right to notice – Borrowers should be intimated about the standard legal procedure.  
• Right to fair value – Lenders must inform borrowers of the expected property price as well as the date and time of the auction. If the property appears undervalued, borrowers can evaluate it or look for a new buyer.  
• Right to be heard – You are entitled to oppose the repossession notice within the notice period. Lenders will notify you of the acceptance or denial of objections and valid reasons for the same within seven days.  
• Right to claim the balance – One can monitor the auction of their property. Lenders are obligated to pay you the remaining amount from the sale proceeds after recovering their outstanding dues.  

The Final Word

The RBI’s Fair Practices Code safeguards the interests of both borrowers and lenders. So, if you are wondering, “What will happen if I stop paying Home Loan EMIs?” remember even if a borrower defaults, s/he does not lose the rights to the asset or to fair treatment. Try to present the facts correctly and negotiate mutually agreeable terms with your lender. If you are a responsible borrower, lenders can counsel you on the best way to handle a housing loan default with minimal dent to your credit record.