HAVE you ever wondered what happens when someone defaults on a home loan?

This is what happens: the creditor will send a default notice to the person who defaulted. The default notice will mention the amount in arrears and gives a deadline within which the defaulter has to repay. If these deadlines are not met, the bank can claim the house, which is pledged as security for the home loan.

Also read: First time home buyer's guide

When does foreclosure process begin?
The process begins when a borrower defaults on loan (mortgaged) payments, and the bank files a public default notice called a Notice of Default or Lis Pendens.

Once the notice is sent and no response is received within the stipulated time, the bank decides when to initiate action. At the determined date, the bank begins the foreclosure proceedings against the borrower under "Recovery of debts due to banks and financial institutions Act, 1993" for recovery of their dues.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (54) of 2002 (SARFAESI Act), gives the banks and financial institutions the right to recover the mortgaged property in case of loan defaults. That is, the banks don’t have to go to the court to get their hands on the property. All right but what are the legal rights in the event of an imminent foreclosure?

* Foreclosures in case of mortgages are governed by the Transfer of Property Act

Also read: 5 things to look out for in your home agreement

Rights of the loan borrower
All borrowers have rights under the Fair Debt Collection Practices Act (also known as the Consumer Credit Protection Act) to avoid or stop abusive, repetitive, and unfair debt collection practices.

Banks can only call you at certain hours. Furthermore, you might also be entitled to a loan modification.

Loan modification is a change in the terms of a current loan, which could vary from interest rate reduction to principal amount reduction.

A good bargain, for a new home buyer?
Once the lender takes control of the property, an independent valuation is carried out by a chartered surveyor who fixes two values for the property -- market value of what the property is actually worth and distress value, which is around 15 to 20 per cent lower than the market value. The property is almost always quoted with the distress value for the minimum bidding price at the auction.

At the auction, the prices can go up depending on bids and the location of the property. This gives a prospective buyer an opportunity to win an auction for a good deal as opposed to buying a property at the existing market value.

Furthermore, a new buyer needs to do some background checks and remember some pointers:
1. Scan newspapers or call banks for auction dates
The best place to look for such auction events in the city where you live, is to check out the popular newspapers. Several nationalized banks periodically advertise in papers regarding auction dates, venue and the location of properties to be put up for sale.

2. Banks sometimes conduct an e-auction
E-auctions are not a popular choice, yet! But banks sometimes announce online as it has wider target audience and is a transparent medium.

3. Verify and secure legal aspects
A caution fee would be charged for those participating in the auction of the property. Once this fee is collected, you will be allowed to check the property beforehand. Don’t forget to ask your lawyer to accompany you for this visit and help you with all the legal aspects of the transaction.

The banks will only auction a legally safe and registered property. Yet, it is advisable that you with the help of your legal counsel, investigate the title of the documents and do your research with the registry for a track record of the past 30 years of the property to understand who were its past owners, how many hands it changed and whether there was any legal tangle in the past that needs to sorted out before your make your winning bid.

Verify all municipal records, tax records, whether the current owner has sole ownership and if it can be transferred to you in accordance with the rules specified in the Transfer of Property Act.

4. Factor in all possible additional expenses
The properties auctioned are sold in the state they were first taken over by the banks, ie, it might have some costs like outstanding payments due in terms of house tax, electricity, repairs, renovation etc. that you might need to pay when you buy the property. Factor in all these aspects when you make the bid.

5. Is the transaction safe?
All sale transactions happen through the bank, so you need not have worries over the technical aspects of the sale.

Read: Now, is the time to hunt four your dream home!

Illustration: Vipurva Parekh

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Abitha Deepak is Head of Content & Research at BankBazaar.com - An online marketplace where you can instantly get loan rate quotes, compare and apply online for all your personal loan, home loan and credit card needs from India's leading banks and NBFCs.

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