What to do if you defaulted on a home loan

When Chowdhary bought their dream apartment with a mortgage, their future looked bright. Then the pandemic hit, and like many homeowners, Choudhary is now facing financial hardship due to job loss. Plagued by poor health and the resulting high medical bills, they struggled to service their Housing loan EMI over the past few months. Things are so bad that they wonder if they will ever be able to repay the loan. They don’t know what happens when the EMI is not paid. They wonder how many missed EMIs would induce a lender to accept an apartment and throw them away. They want to know exactly what steps are required in the foreclosure process and what their options are in this difficult situation. While their credit history was very good.


One or two is missing EMI payment for some reason is not a big deal. In this case, the bank will issue a small warning. However, if they do not pay EMI for three consecutive months, it will be a red flag. The bank will mark them as defaulters and send them a notification. Chowdharies must explain their situation to the bank. Given their impeccable credit history and real reasons, the lender can grant them a grace period. However, their Cibil the appraisal will have a negative impact due to the default.

In the event that the bank decides to call them defaulters, it will then send a full and final 60 days notice in accordance with a law called the SARFESI Act (Law on Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests). The law gives banks and other financial institutions the right to directly auction residential or commercial property that has been pledged to them in order to recover loans from borrowers, and sets out all the procedures to be followed. This 60 day period will be the last chance for Choudhary to redeem their outstanding EMIs prior to the auction. And as a final step, the property will be auctioned off on the open market and the bank will return all of its contributions. Chowdharies will be entitled to any surplus proceeds from the auction.

In the event of an unfortunate situation of default, the best thing Choudhary can do is sell their apartment on their own and pay off the debts to the bank. Homeowners generally do not benefit from the best auction price as this is usually a forced sale. Also, the auction process is time consuming and may not be suitable for a family.

(Content on this page is courtesy of the Center for Investment Education and Training (CIEL). Contribution of Girija Gadre, Arti Bhargava, and Labdhi Mehta.)