Options for Handling Defaulted Housing Loans in the Philippines

(A practical legal guide — Philippine context)

This is general information, not a substitute for tailored legal advice. Where statutes, circulars, or agency programs are mentioned, always check the text of your contract and the latest issuances before acting.

1) First, identify the kind of “housing loan” you have

Not all “housing loans” are treated the same way. Your exact options and rights depend on the legal form of your transaction:

Bank or Pag-IBIG loan secured by a Real Estate Mortgage (REM).
- You already own the property (title/TCT/CCT is in your name), and your lender has a mortgage on it.
- Default may lead to foreclosure (judicial or extrajudicial).
In-house developer financing or Contract-to-Sell (CTS).
- Title is not yet in your name; you are buying on installments from the developer/owner.
- Default is handled by contract cancellation rules and buyer-protection laws (e.g., Maceda Law, PD 957), not mortgage foreclosure.
Assumption of mortgage / “assume balance” deals.
- You took over someone else’s loan or plan to pass yours to a new buyer.
- Requires written lender consent and qualification of the new borrower.
Special cases.
- Co-borrowers/guarantors (solidary liability), OFW borrowers (SPA/consular docs), corporate borrowers (corporate approvals), SPV/FIST assignees (your loan was sold to an asset company).

Knowing which bucket you’re in determines the playbook.

2) Immediate steps when you’re behind

Read the contract. Note the events of default, acceleration clause, interest/penalties, notice provisions, and foreclosure/termination terms.
Gather proofs: payment history, official receipts, demand letters, insurance policies (MRI/fire), tax statements, and any prior restructuring offers.
Contact the lender early (in writing). Ask for a payoff or reinstatement amount, and propose a workout (see Section 3).
Preserve the asset: keep real property taxes current and maintain insurance; tax liens and uninsured losses make everything harder.
Avoid “quick fixes” that waive statutory rights or impose predatory terms. Get advice before you sign.

3) Workout options before foreclosure (REM loans)

Most lenders—including Pag-IBIG—will consider one or more of these, especially for temporary hardship:

Cure & reinstatement. Pay the arrears (missed amortizations, penalties, costs) to restore the loan to good standing. Acceleration can be waived by the lender if it accepts reinstatement.
Repayment plan (“forbearance”). Spread arrears over future months in addition to your current amortization.
Loan restructuring / re-aging.
- Extend the term and reprice interest; unpaid charges may be capitalized.
- Lowers the monthly due but increases total interest paid.
- Some lenders run penalty condonation or amnesty windows from time to time.
Interest repricing / conversion. Switch from variable to fixed (or vice versa), or move to a longer fixed-rate period.
Dación en pago (dation in payment).
- You offer to surrender the property as full settlement of the debt.
- It’s voluntary and needs the creditor’s written acceptance.
- Expect documentary work and taxes (see Section 9).
Private sale to pay the loan.
- Regular sale: sell at a price high enough to fully pay the loan.
- Short sale: sell below the total amount due with the lender’s written consent to waive deficiency.
- Assumption of mortgage: buyer replaces you as borrower, subject to lender approval and full documentation.
Refinancing. Transfer to a new lender with better terms to pay off the defaulted loan.
Insurance claims.
- Mortgage Redemption Insurance (MRI) may pay the balance upon the borrower’s death (and, if covered, permanent disability).
- Fire/Allied Perils insurance may fund repairs or reduce debt if the collateral is damaged.
Calamity or emergency grace periods. In declared disasters, temporary statutory grace periods or agency programs may suspend or stretch dues; effects are time-bound and don’t erase principal.

Tip: Get every offer in writing (new amortization schedule, interest rate, condoned items, fees) and keep proof of submission/delivery.

4) If it’s a CTS / In-house financing (no mortgage yet)

You’re under sale-on-installments rules, not mortgage foreclosure:

Maceda Law (RA 6552) generally grants:
- A grace period to pay without additional interest (number of months paid ≈ number of months’ grace), and
- If you’ve paid at least two years, a cash surrender value of 50% of total payments, plus 5% per year after five years (capped at 90%).
Cancellation typically requires written notice and lapse of a statutory period before rescission is effective.
PD 957 (for subdivision/condo projects) adds consumer safeguards and forum for disputes.
You can often assign your rights (with the developer’s consent) or re-document with a bank/Pag-IBIG take-out.

5) The legal pathways to foreclosure (REM loans)

A. Extrajudicial foreclosure (most common) — Act No. 3135

Available if your mortgage has a power-of-sale clause.
Process (high level):
1. Demand / acceleration (per contract)
2. Notice of sale: posted in public places (for a set period) and published in a newspaper of general circulation once a week for at least three consecutive weeks in the province/city where the property is located.
3. Public auction conducted by the sheriff or authorized officer; lender may credit-bid.
4. Certificate of Sale registered with the Register of Deeds.
5. Redemption: as a general rule, the mortgagor (or successor) may redeem within one (1) year from registration of the sale, by paying the purchase price plus lawful interest and allowed expenses.
6. After redemption expires, buyer consolidates title; writ of possession may issue ex parte to give the purchaser possession.

Note: Some special laws and contracts affect when the one-year period runs and the components of the redemption price. Always check the exact text of your mortgage and the applicable statute/regulatory framework.

B. Judicial foreclosure — Rule 68, Rules of Court

Lender files a court case seeking judgment on the mortgage.
The court fixes a period (commonly 90–120 days) for you to pay; this is your equity of redemption.
If unpaid, the property is sold at auction under court supervision. After confirmation of sale, no statutory right of redemption generally remains (unlike extrajudicial).

C. After the sale

Surplus (if the auction price exceeds your debt and costs) goes back to you.
Deficiency (if sale price is lower than the total debt): lenders can usually pursue a deficiency claim against you (except where a law or special agreement waives it—e.g., some short sales or special statutes for certain installment sales of personal property).
Possession & eviction: Upon consolidation or as allowed by law, buyer may obtain a writ of possession; subsequent ejectment actions may follow against occupants.

6) Your defenses and leverage points

Notice defects: wrong venue, lack of or defective posting/publication, improper description, or sale timing errors can invalidate a sale.
Unconscionable interest/penalties: while usury ceilings are lifted, courts may reduce iniquitous rates and charges.
Pactum commissorium is void: the lender cannot automatically appropriate the property upon default; there must be foreclosure or a voluntary dación en pago.
Computation errors: challenge illegal fees or misapplied charges; request detailed ledgers.
Stay orders:
- Individuals may petition for suspension of payments (and, in limited cases, insolvency relief) under the Financial Rehabilitation and Insolvency Act (FRIA);
- Corporations/partnerships can seek rehabilitation, which stays foreclosure temporarily.
Tax liens: LGU real-property tax liens are superior; sale free of taxes requires proper settlement.

A temporary injunction to stop an auction is extraordinary; courts generally require clear legal defects and posting of a bond.

7) Special regimes and recurring programs

Pag-IBIG Fund: historically offers Loan Restructuring and Penalty Condonation programs, dación en pago, assumption, and reacquisition of foreclosed units. These programs open under specific guidelines and dates, and terms change—verify current circulars before relying on them.
SPV/FIST sales: Banks may transfer your non-performing loan to a special purpose vehicle or FIST corporation. Your obligations remain, but you can negotiate fresh terms with the new creditor—often more flexible on discounts/restructures.
Government/declared calamities: temporary grace periods or moratoria may apply to due dates but typically do not wipe out principal/interest.

8) Credit reporting & collections conduct

Credit reporting: Defaults are reported to credit bureaus under the Credit Information System Act; negative data can affect future borrowing.
Collections standards: Banks and finance companies are bound by conduct rules—no threats, obscenity, public shaming, or contacting your employer beyond lawful bounds. Keep logs; escalate complaints to the lender’s Consumer Assistance unit and, if needed, to the relevant regulator (e.g., BSP for banks, SEC for financing/lending companies, DHSUD/HSAC for developer disputes, DTI for certain consumer concerns, NPC for data privacy violations).

9) Taxes, fees, and paperwork in common exit routes

Exact rates/assessments vary with law, LGU, and valuation; confirm with the BIR, Register of Deeds, and your LGU treasurer.

Private sale/assumption
- Capital Gains Tax (CGT) for individuals on capital assets (commonly 6% of the higher of the gross selling price or zonal/fair market value).
- Documentary Stamp Tax (DST) on deed of sale (commonly about 1.5% of consideration/FMV), plus transfer tax (often ~0.5–0.75%, LGU-dependent), registration fees, and notarial.
- If the buyer assumes your mortgage, the assumed loan is typically part of the selling price for tax purposes.
Dación en pago
- Treated like a conveyance of real property: expect CGT, DST, transfer tax, and registration fees unless exemptions apply.
- Requires a properly drafted Deed of Dación en Pago and lender board/credit approvals.
Foreclosure & redemption
- Certificates, registration, and publication costs are charged per schedule; the redemption price typically includes the auction price, interest, and allowed expenses.
- After redemption lapses, buyer consolidates title; CGT isn’t generally triggered by the foreclosure itself for the mortgagor, but subsequent sales are.

10) Practical strategies (what usually works)

Decide early: keep, sell, or surrender. Delays shrink your options and raise costs.
Ask for the cheapest fix that works: many borrowers just need a term extension and penalty condonation.
If selling: list before auction; price using realistic comps; prepare bank assumption or net-of-loan sale templates.
If surrendering: negotiate dación or short sale with deficiency waiver in writing.
If there are defects: document and raise them before the sale; consider a targeted injunction only when defects are strong and provable.
Keep taxes/dues current: unpaid RPT or condo dues derail closings and eat redemption funds.
Paper trail: send proposals by email + registered mail; keep receipts, screenshots, and proof of delivery.

11) FAQs (selected)

Q: How long is the redemption period after an extrajudicial foreclosure? A: As a general rule, 1 year from the date the certificate of sale is registered with the Register of Deeds. Specific statutes, the kind of creditor, and your mortgage terms can fine-tune details—check both law and contract.

Q: Can the bank still collect after auction? A: Yes, deficiency claims are generally allowed in mortgage foreclosures unless waived by agreement or barred by a specific law.

Q: I’m a CTS buyer who paid for years—do I lose everything on default? A: The Maceda Law grants a grace period and, if you paid at least 2 years, a cash surrender value (50% of total payments, increasing 5% per year after 5 years up to 90%) upon valid cancellation.

Q: My co-borrower died. A: Check MRI; if covered, it may pay off or reduce the balance. Notify the bank and insurer promptly with death and policy documents.

Q: The bank sold my loan to an SPV. A: Your obligations remain, but you now deal with the assignee. You can negotiate new terms; SPVs often accept discounted settlements.

Q: Can I stop a scheduled auction? A: You can reinstate, restructure, or seek injunctive relief if there are serious legal defects. Courts require strong proof and usually a bond.

12) Minimal checklists

For a workout request (email/letter):

Loan & property details (TCT/CCT no., account no.)
Reason for default (with proof) and if temporary/permanent
Specific proposal: cure, plan, restructure (desired term/rate), condonation, dación, sale/assumption timetable
Updated income/supporting documents
Commitment date; ask for written computation and draft terms

For a sale/assumption:

Seller’s IDs, title, tax dec, updated RPT, tax clearances, mortgage statement
Buyer’s IDs, bank qualification, income docs
Deed of Sale or Deed of Assignment with Assumption; lender’s written consent
Closing taxes/fees budget & timeline

13) Where to bring disputes or complaints

Banks → Internal Consumer Assistance; then Bangko Sentral ng Pilipinas (BSP).
Financing/Lending companies → SEC.
Developers/CTS disputes → DHSUD and HSAC (adjudication).
Data privacy/harassment → National Privacy Commission; also raise to the primary regulator.
Court remedies → RTC with jurisdiction over the property/parties (injunction, annulment of sale, damages).

14) Bottom line

If you want to keep the home: push for restructure + penalty relief early; keep taxes/insurance current; document everything.
If you’re letting go: aim for a controlled exit—private sale, assumption, or dación—securing a deficiency waiver where possible.
If the lender proceeds to sale: track notices, prepare for redemption or a legal challenge if there are real defects, and plan post-sale housing and finances.

If you tell me which setup you’re in (bank/Pag-IBIG vs. CTS), your arrears, and your goal (keep vs. exit), I can draft a concrete step-by-step plan and a one-page letter you can send to your lender or developer.