When you purchase your first home, you strain your finances and deplete all of your savings. You also want to get the biggest house loan possible so that you may buy as much property as feasible with the money you have. Mortgages are long-term obligations that need monthly payments for at least 15-20 years. Your financial responsibilities may alter substantially over time, and you may find yourself unable to pay your mortgage EMI. Though most lenders are prepared to be flexible if they are notified of a single default in advance, multiple defaults can have major consequences. If you fail to pay an EMI, you may be required to pay the difference together with the next month’s EMI.
However, missing one or two EMI payments due to unexpected circumstances would not be a major issue. The bank will send an instant warning in this case. If you miss three consecutive EMI payments, it will be considered a red flag. The bank will identify and inform you as defaulters. In addition, if you have a strong payment history and justification, the lender may provide you a grace period. The default, on the other hand, will have a negative influence on your CIBIL score.
Consequences of Home Loan Default
If you default on your property loan in India, you may suffer the following consequences:
Late Fees
If you default on your mortgage, you will be charged late fees, fines, and, in some cases, punitive interest. Punitive interest is typically 1% to 2% of the EMI. As a result, depending on the circumstances, you may be forced to pay punitive interest on the whole outstanding debt for the duration of the default period. This is in addition to any lender-imposed late costs.
Possession of a Collateral
After three consecutive EMI defaults, banks and financial institutions usually classify a loan default as a Non-Performing Asset (NPA). As a result, they initiated the debt collection process in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002. (SARFAESI Act). You are served with a legal notice and have 60 days to fulfil your obligations. However, under the SARFAESI Act, banks have the ability to confiscate your collateral if you do not fulfil your obligations within 60 days. Your collateral can be seized without a court order under the SARFAESI Act.
Collateral Auction
If you fail to repay the loan within 60 days, the bank will send you another notice stating the value of the collateral, whether real estate or jewellery, as well as the date of auction. If the collateral is a life insurance policy, the earnings are received by the insurer before the lender.
Impact on CIBIL Score
Even one missed EMI payment will appear on your credit report, decreasing your credit score. A single loan default might reduce your credit score by 50-70 points. This affects not only your credit score but also your creditworthiness for future borrowing. You may be unable to qualify for the best credit cards in India if you have a low credit score. Banks view you as a high-risk borrower, lowering your chances of securing a loan. Even if you are approved for a loan, it will be subject to tight terms and conditions.
To avoid loan default, you might request a lower EMI and more efficient financing from your lender. If you are experiencing financial difficulties, you may approach the lender and seek an EMI-free time. Banks may provide you a three- to six-month EMI payment reduction 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. Making split payments is another method for reducing the EMI load. This is made feasible via a house loan overdraft. If you have extra money and an active house loan, making a partial payment to your overdraft account may alleviate your financial burden.