Home Loan Default: Know Ways to overcome debt distress

Buying a home via Loan has become quite easier these days especially for first time buyers. With the change in the financial landscape these days almost all the banks and financial institutions lend money to buy home which can be easily repaid in easy monthly installments (EMI). But sometimes due to financial crisis, a loan borrower fails to pay the EMI on time due to which they are considered as defaulters. These unavoidable circumstances are known as financial distress or debt distress.

Home Loan Default

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So, scroll down below and read this blog to know about the consequences and ways to overcome such situations:

Consequences of failure of EMI payments

An individual when takes loan from a bank has to pay EMIs to repay the amount. But if he/she fails to pay EMIs for 90 consecutive days, then in such situation, banks place them under the category of Nonperforming asset (NPA). At this time, banks quickly issue legal notice to the home loan borrower to pay dues in 60 days’ time.

Still, if a borrower fails to pay the outstanding amount within 60 days, banks again issue a public notice to the borrower about the auction of the concerned property as assessed by them in next 30 days.

So if calculated, banks give around five months’ time to a loan borrower before taking on the possession of the property.

Action taken by banks

Experts say that before auctioning the property, banks or financial institutions consider all the possible alternatives. For instance, if a borrower fails to pay EMI due to job loss, or some other medical or health emergency, then banks consider such circumstances and ask loan borrower to provide all the relevant proofs to them. If convinced then they restructure the complete loan EMI and take out other options to lessen the borrower’s burden.

In extreme cases, if a borrower fails to convince banks, then auctioning a property is the last option. In order to recover a home loan, banks may sell or seize property which has been mortgaged by the borrower. This authority comes under SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act) which is given by a loan borrower to the banks, so that they can protect their interest rates.

How to overcome financial distress?

Various options are available to home loan borrowers as suggested by banks and financial institutions to overcome financial distress. Some of them are:

  • Discussing the problem with the bank officials and try to resolve it with all possible alternatives.

  • Provide valid proofs to banks as in why you are not able to pay EMIs. It could be an accident, financial crisis or loss of job.

  • Ask your bank to refinance the complete home loan amount

  • Liquidate existing savings and investments to repay outstanding EMIs

  • In many cases, borrowers themselves can sell their property and pay back the amount instead of bank taking an action.

  • Keep in mind that before selling the property, the borrower must take bank in confidence and then only perform an action.