Let’s say you’ve taken a loan for a house on the 10th floor of a building, under construction. Let’s say you’ve gone for the 80:20 scheme, where you’ve paid 20% and the builder says he’ll pay the EMI on the 80% until construction is complete. Let’s say that the builder runs out of money – maybe because interest rates are too high, maybe because he couldn’t sell the remaining flats, or maybe because of the Realty Ponzi scheme.
Either ways, he throws up his hands and says he can’t finish the property. Six months pass, and there’s no sign of any action. The bank now says you have to pay the EMI on the 80%. What happens now?
Many people believe the bank should take over the property and recover the money, and your EMI is no longer applicable. This is a gross misunderstanding.
You are fully responsible for the loan repayment.
Remember, the builder has taken his money. The bank has given it. The loan was given to you, not the builder, against your earning capacity and the collateral of the property.
When the builder was paying the EMI, the bank didn’t care – it had given you a loan, but the builder was paying interest.
When the builder stops paying interest, it will ask you to pay instead.
If you decide not to pay, the bank will attempt to sell the property. It is unlikely that people want to pay full price for a stalled project, and there will be a shortfall (auction amount could be less than the total loan). You have to now make up the difference, immediately, including all interest accrued in this sale/waiting period.
If you do not, you will be labelled a defaulter under CIBIL. (You might already be notified before the bank attempts to sell). This affects your ability to get a loan in the future.
And then, the bank can go after your other assets under the SARFAESI act. This includes all possessions you own like a car, another property or such. Further if the loan is taken jointly in the name of your wife or parents, their properties too are at stake. Personal/Home Loans in India are “full recourse” , where the bank or financial institution has full recourse to your other assets in case of a default.
The only thing a court cannot attach (to pay back such a loan) is your Provident Fund (PF) account. (I may not be legally up to date on this, though)
This applies to 80:20 loans (where the full amount has already been disbursed) and to regular home loans (where only partial disbursement has happened). This also applies to loans where you have been paying the EMI – you are still responsible for the rest of the loan.
Your options are to “settle”, hoping that the bank doesn’t want to go through the long legal process. The other option is to stall through the legal process, hoping that this will just go away, considering the extreme delays in our legal system. (This will still impact your CIBIL score) Since technically the builder defaulted to you, you have to take legal action against him for any further recovery.
(In one such case, a builder in Kolkata defaulted on a 176 cr. loan, and the bank is likely to take over the project and sell the flats. The case is still evolving.)
What this means is: Do not assume your responsibility ends if the builder defaults and bank takes over the house. You have a liability to pay anyway, your other assets can be attached and you will get a hit on your CIBIL score.