You take a home loan for a longer duration compared to other credit facilities. You pay them off over periods that can sometimes span 20 to 30 years. Because of this longer duration, it also brings some uncertainties regarding repayment of the loan, as 20 or 30 years is a considerable amount of time during which you may experience various financial ups and downs.

You get a loan from any bank or financial institution based on your present income and repayment capacity, but nobody knows about future circumstances. You may encounter some financial challenges like losing a job or facing a health crisis, especially considering the long duration of your home loan. These challenges can lead to difficulties in repaying the housing loan.

What is home loan default?

If you fail to pay the scheduled EMIs to the bank or lender over a certain period, it leads to default. However, it is important to note that if you miss the EMI for one or two months and then resume paying the installment again, clearing the pending installments with a penalty, there’s usually no problem. But if you miss consecutive three monthly EMIs, your home loan will be categorized as non-performing asset (NPA) in their book. Typically, banks allow a 90-day window for communication and remediation efforts during this period.

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Home loan default implications:

A home loan default has multiple negative impacts on you as a borrower. The immediate effect is a decline in your credit score, while the most significant long-term consequence is the difficulty you’ll face in obtaining any future loans.

“Non-payment will have a negative impact on your long-term finances. Late payments will start wrecking your credit score. Non-payment for more than 90 days can lead to your lender categorising your loan as an NPA, after which they may invoke provisions for loan recovery,” says Adhil Shetty, CEO, BankBazaar.com.

Legal consequences of defaulting on a home loan

Banks follow a legal process when addressing home loan defaults. Under the SARFAESI Act, 2002, banks and financial institutions are allowed to seize and auction properties to recover loan amounts. This law was brought to help the lenders deal better with their non-performing assets. However, the seizure and auction of properties is the last resort for lenders and they initially issue multiple notices to home loan borrowers and give ample time to clear outstanding dues along with late fees and penalties.

“Apart from the late payment penalties and increasing interest, you may also face legal action if the post-dated cheques you’ve given to the lender bounce. In case of secure loans such as home loans, the lender owns the property till the loan is paid. The property can be auctioned to recover the dues as mandated by the SARFAESI Act,” says Shetty.

Your rights and protections in case of loan default

The Reserve Bank of India (RBI) issues guidelines time to time to protect the interests of both borrowers and lenders in cases of home loan defaults. These guidelines categorically state that the lending bank must issue a notice to the borrower before taking any action and give him or her a 60-day window to clear the outstanding dues.

Rules say lenders must follow fair practices in loan recovery

“While the lender has the option to initiate recovery in case of defaults, RBI rules clearly stipulate that they should not resort to undue harassment viz; persistently bothering the borrowers at odd hours, use muscle power for recovery of loans etc. Recovery should normally be made only at a central designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at central designated place on two or more successive occasions,” explains shetty.

Rules for property repossession and auction processes

“The lender cannot take any actions, such as acquiring or auctioning your property or assets kept with the lender as collateral, without providing you ample notice of 30-60 days. If you are unable to reach an agreement with the bank during this period and the lender takes steps to auction the asset, they are mandated to get the valuation done from an approved valuer,” Shetty said.

This ensures that the repossessed asset is not sold at any price determined unilaterally by the lender.

“In case you believe that the valuation is incorrect or undervalued, you have the right to contest it. Also, if the sale proceeds from the auction of the asset is more than the total outstanding dues, then you are entitled to the receive the balance amount from the lender,” he suggests.

Borrower protections against harassment

Finally, and most importantly, you are entitled to humane and dignified treatment during the entire process. You are entitled from protection from harassment, coercion and undue interference.