For most people, buying a home is one of the most expensive purchases they will make in their lifetime. At times, the house you desire may be out of your budget or financial reach. Applying for a Home Loan is the best possible solution in such situations. But, there are certain things you should know about Home Loans before applying for one.
Imagine a situation when you have availed a Home Loan, and before you could finish paying up all the EMIs, you fall into a financial crisis. Is taking the risk of defaulting on a Home Loan repayment, a way to fix your present economic crunch? âNoâ is the certain answer.
Defaulting on a Home Loan can be devastating for more than one reason. Firstly, you will lose the home that you worked so hard to pay for. Besides this, your credit score takes a huge hit, making it hard for you to secure a Home Loan again in the future. The Home Loan default rate in India is relatively low, compared to other types of loans, since theyâre usually taken out by salaried individuals who can keep up with the EMI payments.
If faced with such a situation, you could ask the bank for an alternative, which could go easier on your finances like prepayment of Home Loans, rescheduling your debt, restructuring the loan, or making any other default Home Loan modifications. Instead, if you are planning to take this risk, here are four possible consequences you might have to face:
Four Possible Consequences of Defaulting on a Home Loan
Issuance of Notice
Even if paying EMIs seems like an easy task, there are certain probabilities you have to take into account before you commit to a Home Loan scheme. At some point, you might find yourself unable to repay your Home Loan EMI. You have to anticipate certain unfortunate developments that could come your way, like job termination, a death in the family, a medical emergency, or a business failure, which might exhaust your resources.
If you fail to make a payment, the lender would send you a notice, reminding you of the payment. According to the guidelines set by RBI, the loan should be classified as Non-Performing Assets or NPA if the lender has to send a notice to the borrower. Once you receive the notice, you have to settle the account or regularise your payments within 60 days.
Physical Possession of the Mortgaged Property
If you default on paying your EMIs for more than six months, banks have the authority to enforce the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI). Under this act, the lenders are given the power to recover non-performing mortgaged properties, without any intervention from the court. However, most lenders prefer negotiation, as confiscating a mortgaged property is a long-drawn-out and cumbersome process.
Auctioning of the Mortgaged Property
In general, a bank waits for three months to declare the asset as a non-performing asset. After this period, the bank can go forward with procedures to recover the property, under the SARFAESI Act. The bank, 30 days after taking possession of the property, announces the date it will be auctioned off, and sends you a letter informing you about the date and venue of the sale. You can also utilise this period to settle the account to prevent the auction. If you are looking for a smart Home Loan option, opt for Bajaj Finserv that offers nil foreclosure charges and part-prepayment facilities
Refunding of Dues
Once the auction is complete, and if the auction generates any excess, the lender would refund the extra amount to you.
Below are a Few Things that You Can do to Save Yourself From being a Defaulter
Communicate with Your Lender
Financial institutions in the present times are more empathetic to your plight than you think they are. If you can arrange for a proper one-on-one meeting with your lender, there is a high chance that they will listen to you and understand your situation. Maintaining a good track record with your earlier payments can go a long way in this regard, because ultimately, a bank wouldnât want to lose a valuable customer and hence will be willing to reschedule your repayments to a time when your situation gets better.
Maintain a Savings Account
Have a savings account especially dedicated to unsavoury situations. Make a habit of budgeting your finances and add the remaining amount to a separate bank account. Make sure only to access this account in the direst of circumstances. Several NBFCs like Bajaj Finserv offer good policy terms with a maturity benefit plan.
Reschedule the Loan Tenure
If you have lost your job recently due to cost-cutting measures, you can ask the bank to reschedule your loan repayments. Again, this depends on your rapport with the lender. Making timely payments is one way to keep yourself in your lenderâs good books. To successfully reschedule your loan tenure, you need to address your bank manager and be forthcoming with them, while negotiating an extension of your loan term.
Reach a Settlement
Settling a loan works best when you have almost reached the end of your repayment schedule. What you need to do is raise financial capital (perhaps from friends and family) and quickly foreclose your loan. This may include a small monetary penalty, but could help you avoid an uncomfortable situation while cutting down on the total interest owed to the lender.
Switch to a Different Lender
You may not know this but you can actually transfer your debt to a different bank. This can help you because sometimes the bank you have borrowed the loan from may have a higher rate of interest than its counterparts. You can switch up for a very small amount of money, and acquire much more relaxed loan terms. For instance, financiers like Bajaj Finserv offer easy Home Loans with instant approval schemes.
In conclusion, defaulting on your Home Loan would only have a negative impact on your finances. It could also lead to you losing out on your house, for which you might have worked really hard. Apply for a Home Loan only after having a clear understanding of your finances. You could use a emi calculator for Home Loan to plan your finances better.
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