The basic concept of foreclosure is pretty simple to understand. The Oxford Dictionary defines a foreclosure as the process under which ‘one takes control of somebody’s property because they have not paid back money that they borrowed to buy it. Every home loan agreement has a clause that gives the lender the right to repossess your property and sell it if the EMI default period exceeds six months. Typically, banks start to send notices about property seizures after three missed EMI payments. They give the borrower 60 days to raise an objection. If the borrower fails to do so, they start the property repossession and foreclosure process. Advertisements are published about the foreclosed property in leading newspapers, inviting bids with a minimum reserve price. Notices of the sale are also made public on the official portal of the bank and its social media accounts. Following this, the bank conducts a foreclosure auction of the property in an open market, to recover the outstanding amount.
When does a bank start property foreclosure?
A wrongly held notion about property foreclosure is that banks are eager to start the property foreclosure process if the borrower fails to pay the EMIs on time. While it is true that a lender would go all the way to recover what an individual owes it, property foreclosure is never its first choice. When you default on your home loan EMI payment for the first time, banks would simply levy a penalty. It is only when the default continues for three months that they get cautious and start sending notices. If the default continues for six months that is when property foreclosure is initiated.
It is important to note here that repossessing properties and selling them through auctions is a complex and time-consuming process that requires due diligence along with significant monetary expenses. In fact, the cost of foreclosure is so high and the process so complicated that most banks in India hire third-party agencies to complete the process. That is why banks are never keen on launching the property foreclosure process unless it is absolutely necessary.
How to avoid a property foreclosure?
One of the biggest mistakes borrowers make is to avoid the lender in times of monetary distress. Communicating with your bank is crucial to avoid property foreclosure, even if you are not able to pay your home loan EMIs temporarily. Any financial expert would tell you that you must inform your bank of any reason that may prevent you from making timely EMI payments. Even though the bank may continue to charge a penalty, it would be in your interest for the bank to understand that the situation is temporary and you intend to make complete payment in the future.
However, merely stating your good intentions will not be enough. Your repayment history and previous interactions with the bank will act as proof for the bank to be convinced and lend you a helping hand in time of need. Therefore, it is important to maintain a good credit score and relationship with the bank at all times.
Should you buy a foreclosed property?
As is true of all propositions, there are pros and cons to investing in a foreclosed property. Since the bank is in a hurry to offload the property and recover its money, such property is often sold at less than its market value, making it an attractive option for buyers.
However, the new owner will become responsible for all the legal, financial, and most importantly, physical burdens associated with the foreclosed property. He/she will have to pay pending utility bills and vacate the property if the previous owner or his tenant refused to move out. It only makes sense to invest in foreclosed properties if they are valued at such a rate that the buyer does not mind the additional responsibilities associated with the purchase.
Another area of concern would be housing finance. If you plan to get a home loan for the purchase of a foreclosed property, you will find it difficult to find lenders willing to oblige. Typically, the deal would have to be closed using your finances.