Generally, every borrower avails of a loan to fulfill their aspirations. A loan provides money quickly, which a borrower can use to meet urgent financial needs. However, not paying the loan dues on time can affect the borrower negatively. As a mortgage loan is approved against a property, defaulting on loan repayments may even mean losing possession of the property.
Read on to know what happens when a borrower defaults on mortgage loan repayments.
What Happens When You Default On a Mortgage Loan?
The Credit Score Tumbles
According to the Credit Information Companies (Regulation) Act, 2005, all financial institutions operating in the Indian Union need to report all credit transactions to credit bureaus, such as CIBIL. Hence, whenever a borrower defaults on a loan, like a mortgage loan, the information is quickly passed on to the credit bureau. The credit bureau automatically reduces the borrower’s credit score. Moreover, it has an adverse impact on the borrower’s credit history. With a negative credit history, it may become difficult to apply for a loan or card in the future.
The Lender May Sue the Borrower
Lenders usually send reminders several times before moving to the court of law. They also offer a grace period to allow the borrower to repay. If, however, the borrower still does not pay the loan dues, the lender may initiate legal proceedings as per the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFAESI). At first, they serve the borrower with a legal notice and request them to pay up the mortgage loan interest, along with the principal. If the borrower is still unable to pay, the lender may take possession of the property and liquidate it to get its dues back.
An Increase in Tax Bills
In case the lender sells off the borrower’s property, that does not mark an end to the borrower’s woes. If the property’s liquidation value is more than the outstanding mortgage loan dues, the lender hands over the excess money to the borrower. If, however, if there is a shortfall, the borrower needs to pay the difference between the outstanding mortgage loan amount and the property’s liquidation value. Moreover, the borrower may have to shell out extra money in the form of a long-term or short-term capital gains tax.
What Can You Do to Avoid Mortgage Loan Default?
Avoiding mortgage loan default can be easy if you keep the following points in mind:
Opt For Loan Restructuring
If you are sure that your financial problem is short-term, you may request the lender to restructure your mortgage loan. However, the lender will look at your previous track record of mortgage loan interest and principal payment and evaluate your credit history. Through loan restructuring, the lender gives you additional time to repay the mortgage loan.
By making frequent part-payments, you can reduce the mortgage loan interest liability. Alternatively, you may request your lender to extend the tenure, which will bring down the EMIs. After increasing your EMI you can also save some money in your savings that you can use for your further use.
Close Fixed Deposits Prematurely
In case you have a fixed deposit or money lying idle in the savings account, you may use that amount to clear off the mortgage loan bills. While closing a fixed deposit prematurely will hamper your long-term goals, it will enable you to save your home from liquidation.
A mortgage loan helps you to fulfill several dreams. However, not paying the dues on time can have a negative impact on your finances. Hence, try to go through the mortgage loan terms before signing on the dotted line.