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Posted on: 18/04/2013

Need Of Right Advise When You Are At Default On A Home Loan

Most of people taking a home loan to buy a house, a situation where the borrower finds it difficult to pay his EMI does arise in many cases. How the borrows deals with this situation should depend on whether the problem is temporary of permanent.

WHEN THE PROBLEM IS TEMPORARY: -

Businesspeople and professionals, who tend to have more irregular cash flows, often face temporary problems. They expect money from a particular transaction but, for some reason, the payment does not materialize.

Option 1:- When cash flows fluctuate, their expenses remain fixed, raising the spectre of a loan default. Financial planners suggest that people whose cash flows are irregular should create a contingency fund before they go in for a home loan. They can dip into this fund whenever they face a temporary cash crunch. Option 2:- To either liquidate or borrow against a financial instrument that the borrower may possess. He may break a fixed deposit or take a loan against shares or insurance policies.

Option 3:- To go in for an unsecured loan like a personal loan. Though a personal loan is a high-cost source of fund, you may opt for it if you expect to get money from some source and hence will be taking this loan for only a short while. months. Also with substantial increase in input costs over years, virtually no scope left for any further price correction.

WHEN YOU PROBLEM IS PERMANENTS:-

If you realize that your cash flow problems are not going to go away anything in the near future and you won’t be able to pay your EMIs, then you need to exercise a different set of options.

Option 1:- To sell the house itself. Selling the house yourself and repaying the bank is a better option than having the bank auction it for reasons that we have explained below.

Option 2:- To borrow from informal sources, like family and friends. The third option would be to negotiate with the bank and get the loan restructured. The important thing here is to put all your card on the table and let the bank know about the reality of your situation. Remember that for the bank liquidating the property is a time-consuming process. So banks do tend to be open to discussing with you what can be done.

WHAT TO DO?

Solution: 1
The bank could, for instance, reduce the EMI while increasing the tenure of the loan. Suppose you had a higher paying job which you lost and now you have a lower paying job-the bank may then reduce your EMI to match your current affordability level. Banks are more interested in getting their principal and a viable interest-rate back, so they could agree to the option of lowering the EMI and increasing your tenure.

Solution: 2 It could be discussed with the bank would be to rent your current house and move into a smaller one. For instance, if the apartment against which you have taken the loan has three bedrooms, you could rent it out, say, for Rs. 40,000/- and move into a smaller apartment whose rent is Rs. 20,000/- The balance Rs. 20,000/- that you now earn could go into paying the EMI.

YOU MUST KNOW THE FACTS:
Failure to pay your EMIs will, however, dent your credit score. “Borrowers must understand that defaulting on a home loan is a very serious issue which will end up spoiling their credit score. A poor credit score means that you could find yourself shut out of the loan market in the future.

Borrowers must also avoid adopting a confrontationist approach in such situations. If the borrowers takes an aggressive stance, it could work against his interest because the security that the bank has is much more valuable.

Remember that the bank will get its money back. It will invoke the SARFAESI Act and take over your house. The house could cost Rs. 1.50 crore while your outstanding loan may be only Rs. 60 lakh. The bank will go ahead and auction it.

As the bank is more concerned with selling off the property and get its money back, it will auction it. The price fetched in an auction could be lower than the going market rate. The bank will collect its outstanding principal and any other costs it may have incurred in auctioning it and then give what is left to the borrower. Thus, the borrower ends up being the loser as he does not get the right value for his house.