Buying a new house is an expensive purchase. It is likely that you may need to avail a loan to make this purchase. A home loan has its own benefits, like financial assistance and tax benefits. But, there is a flip side, too - payment defaults. You must keep in mind that there may be a possibility that you would be unable to pay the EMIs. What happens in this case?

Contrary to what most people fear, banks would not foreclose the loan in case of default in one or two EMI payments. Foreclosure is generally a bank's last resort. There is a set procedure that all financial lending institutions like banks follow, in case of default in payments.

• If you do not pay one EMI, the bank will not intimate you. But, if you default on two consecutive EMIs, it will send you a reminder notice.
• If you fail to pay three consecutive EMIs, the bank will start treating the loan as a Non-Performing Asset (NPA) and can thus enforce the SARFAESI Act 2002 to start the recovery process.
• After a no-show of three months (or three instalments), the bank will issue a legal notice to you, asking to repay the dues. If you continue to default on the payments still for the next two months (i.e. miss on five EMIs), it will send you a notice that it has valued the said property for a certain amount and will be auctioning the same. The auction date is generally set one month from the date of the notice. This is to give you, i.e. the lender, another month to make the payments.

There could be several reasons behind defaulting on the EMIs. It is important that you explain your reasons to the bank. Cutting off communication with the bank, and avoiding their calls and notices will not help you. Rather, it will put you in a bad light.

Following are some things you can do to manage such a situation:

• You must meet the bank executives and explain your situation to them - whether it is the loss of a job or sudden health issues. Try and convince the bank that you will be able to resume the regular payment schedule in the next 3-6 months. This way, banks will offer you a moratorium period for some months.
• If you are struggling with the high interest rate, you must explain the same to the bank and request them to restructure the loan. The bank may decide to increase your loan tenure to make payments easy on your budget.
• In case the bank refuses to restructure the loan, or you come across another bank that is offering loans at a lower interest rate, you should consider refinancing your loan. However, you must calculate the exact processing fee and other expenses before proceeding.
• To manage this unforeseen situation, you can consider selling off your other investments like mutual funds or fixed deposits.