What happens to a home loan if the borrower dies?

[ecis2016.org] We examine what happens to a home loan, if the borrower passes away in the middle of the repayment schedule

A large number of people have died due to the two waves of the Coronavirus pandemic in India, arguably making it India’s worst human tragedy since partition and independence. The untimely demise of a property owner, apart from inflicting a great personal loss to the family, might also create financial complications, if the deceased was servicing a home loan. The problem becomes graver, if the borrower was the only earning member in the family.

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This leads the family be confronted with many questions.

What if the family is not in a position to pay the home loan EMI every month?

Do banks quickly sell off the property to recover their losses and leave the family struggling to look for a new home, even as it copes with the loss of a dear one?

While it is true that the bank will repossess the property and sell it to recover losses, using the powers provided to it by the civil court, the Debt Recovery Tribunal or the SARFAESI Act, the lender would not do such a thing in case the borrower has someone to stake claim on his property and pay up the loan.

“Taking possession of the property, is generally the last option for financial institutions. Their prime business is lending and earning profits and not resorting to desperate measures like conducting property auctions. These things actually cost them dearly and that is why banks leave no stone unturned, to make an arrangement that is beneficial for the family of the borrower and itself,” says a highly-placed banking official in a public sector bank, requesting anonymity.

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As auction of the property is the last option, what are the other options available to the bank and the family of the deceased?

Home loan insurance

Banks typically ask borrowers to buy a home loan insurance policy (not to be confused with home insurance), along with the home loan. While a home insurance provides cover for the contents of your home and its structure in case of a natural calamity, etc., a home loan insurance covers the risk if the borrower dies because of natural causes.

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A home loan insurance policy that was bought along with the home loan, could give some relief to the family of the deceased. In this case, the insurer will pay the remaining loan amount to the bank and free the property for the family from all monetary obligations. However, the insurer would do so only under certain circumstances. These include:

The deceased has died an unnatural death

These policies typically cover:

1. Natural death
2. Death caused by health-related issues
3. Accidental death

They do not cover death caused by:

1. Suicide
2. Self-inflicted injuries
3. Death caused by excessive use of alcohol
4. Death caused by sexually transmitted diseases like HIV/AIDS
5. Murder by a beneficiary

The loan was not taken jointly

In case the loan was taken jointly, the co-applicant will be responsible to pay the EMI. This holds true, even if the co-applicant is a homemaker and not an earning member.

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It is also important to know that since your home loan provider and your home loan insurer would, typically, be different entities, it would take several days before you are able to arrange the money through the home loan insurance of the deceased, to pay up to the bank. Negotiate with the bank accordingly.

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Repayment by a co-applicant, guarantor or legal heir

In the absence of a home loan protection policy, the responsibility to pay up the loan would fall on the co-applicant (if the loan is jointly applied for), the guarantor (if there is a guarantor) or the legal heir. In either case, the bank will create a new loan contract, issuing a new loan in the name of the new owner, depending on his payment capacity, credit profile and financial standing. If neither of these methods work, the bank would ultimately sell the property, recover its losses and pay up their share in the profit to the heirs.

The legal heirs of the property must also keep in mind that they will not be able lay any claim over the property, unless all the debts of the deceased are settled. However, banks cannot force the deceased’s next of kin to pay off the debt. “Banks are empathetic and try to work out a solution in genuine cases. The borrower’s family must immediately get in touch with the bank and share their issues with the officials. No hostile moves are made by the banks in such cases,” the official adds.

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What will the bank do if there is no home loan insurance?

These are some of the common occurrences that will happen after the demise of the home loan borrower, if there is no home loan insurance:

Approach the family, co-applicants: The bank will first approach the closest family members of the deceased and inquire if any of them will be able to repay the loan. It is also for this reason that banks encourage people to apply for joint home loans. In case of the untimely demise of one applicant, they can deal with the other co-applicant. This makes it easier for them to do business. The banks find it a best-case scenario if there are people who would be willing to repay the outstanding loan.

Help you make choices: In case all close family members express their inability to cope with the monetary burden caused by home loan EMIs, the bank would then think of options it could offer to the family of the late borrower.

1. It could increase the tenure, to lower the EMI outgo. This means the loan will be repaid over a longer period now but the effective monthly burden on the family would be less.
2. It could increase the EMIs to shorten the tenure, if the family of the deceased so wishes.
3. It would, as a last resort, sell the property in the open market to recover its dues. In case it earns more money than the late borrower owed it through the sale, it would return the difference to the family of the late borrower.

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