All Is Not Lost If a Borrower Defaults On Home EMI Payment

Tribhuwan Sharma, a photo journalist with a Delhi-based company for 18 years, was a worried man over how he is going to pay his equated monthly installments (EMIs) on a home loan he took a few years ago. He was recently asked to resign from his job, or face a termination notice. He had little choice. 

Between the two hard decisions, to face termination or resign, Sharma opted to resign from his old company. His logic was that if he gets all the dues owed to him, he could still repay a portion or even full repayment rather than default on the loan. He had yet to make 54 more installment payments. 

Borrowers need to wisely plan and think through unexpected developments like a job loss, says Anuj Puri, Chairman - ANAROCK Property Consultants. “A bank considers home loans to be in default when the borrower fails to pay or is behind payment schedule by 90 days. In such a case, a borrower would have missed three payments of EMI,” adds Puri.

Without a regular income, Sharma was aware of the difficulties for paying EMIs. So what options does he have to avoid a default notice in case he cannot pay his EMIs due to unavoidable reasons?

“Banks are ready to understand the reasons behind non-payment of EMIs, which might be due to a financial crisis, accident, a job loss, if the borrower approaches the bank with an explanation,” says Puri.

Normally, banks do not seize borrowers’ assets immediately, says Puri. They usually send a notice stating that the borrower has been missing the payments, further informing that action that would be taken in case of a default. Banks also send their executives to meet the borrower and understand the reasons for non-payment.

Puri points out that once a genuine reason is conveyed by the borrower or is otherwise evident to the lender; the bank restructures the EMI plan and extends the loan tenure request from the borrower.

Puri further points out that a seized property of a defaulter is sold by the bank only in extreme cases. In a worst case scenario, if the property of the borrower is sold within three years of acquisition, then the borrower can expect to receive a profit on the sale. However, if the property is sold after three years, the borrower can draw tax exemption benefits, states Puri.

Meanwhile, Sharma took a smart move. He approached the bank with his bank records to show that he had been paying all his loans on time so far. The bank, when convinced about the genuineness of the case, will revise the repayment schedule.  As it happened, the banks gave Sharma a grace period of two EMIs to meet the shortfall. This rule relaxation gave him ample time to get back his dues from his employer and repay the balance EMIs. This was a wise decision considering that he was still looking for another job.

What to do when you default

The borrower can sell his or her property and pay back the amount instead of waiting for the banks to take over the property for sale, says Puri.

Puri also gave a few tips to borrowers who fall back on EMI payment for genuine reasons:

• The monthly EMI outgo should not be more than 50 per cent of the monthly income.

• The loan tenure should be as short as possible, as this will lead to lower interest payment. 

• Financial management must be done by the borrower for timely and regular EMI payment. 

• A borrower’s credit profile gets affected if an EMI payment is missed. 

• The borrower must keep track of loans and interest rates to avail the best loan rate offer.

• If multiple loans have been taken from banks, then the loan with a higher interest rate must be paid first. 

• Prioritisation of loan repayment is necessary. 

• If any bonus or profit made in an investment is received, then this amount should be used for repaying the loan instead of non-critical spends.