What is default in real estate? What are its consequences?


When you invest in real estate, one of the most critical questions is the source of funding the investment? Most people opt for home loans while buying a house. They pay a minimum down payment of 20% and take a home loan for the remaining 80%.

Default in real estate

A home loan is a secured loan that a non-banking financial company (NBFC) or a bank gives by keeping the underlying house as collateral. A home loan taken should be repaid to the lender in the form of Equated Monthly Installments (EMIs). When a person fails to repay this home loan, he/she is issued a notice. Even after multiple notices, if a borrower fails to pay the home loan, he defaults. Defaulting on a home loan has severe consequences as mentioned below:

Impact on credit score: Multiple notices against not paying the outstanding home loan can impact your credit score. This will put you in a bad light if you intend to opt for a loan in future as you will be termed as a ‘high-risk individual’. If a lender sanctions a home loan, it will be only under stringent terms and conditions.

Legal notice: If a notice issued to pay the home loan is ignored thrice, then the loan is treated as a non-performing asset by the NBFC, or banks. Under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002, the lending institution issues a legal notice and demands the outstanding amount to be repaid within 60 days.

Collateral possession: If you do not honour the legal notices sent by the bank or the NBFC, then according to the SARFAESI Act, 2002, the collateral comes into the possession of a lending institution. Meanwhile, the court cannot intervene and defer the possession of the collateral.

Auction of collateral: Once the payment is not made, and the lending institution takes possession of the property, then it prepares to auction it to recover the dues. This is done by sending the borrower a notice stating the value of the collateral.

Also Read: Home loans' tax benefits in 2024

Frequently Asked Questions

Ans 1. If a home loan is defaulted on repeatedly, the property may be auctioned by the lender to recover its dues.

Ans 2. Even if you are a defaulter in the past, a home loan may be granted, depending on your current financial situation. However, strict terms and conditions may be applicable.

Ans 3. A loan default case is a civil case and not a criminal one. Hence, the defaulter will only lose his property and not be jailed.

Ans 4. Around 1-2% of the loan amount is the penalty one has to pay for missed EMIs.

Ans 5. Non-payment of a home loan is a breach of contract against which a lender has the right to take an action.