If the Covid pandemic has taught us anything, it is the absolute fragility of life. Though it is an unfortunate lesson, it was a much-needed one and it has opened our eyes to the harsh realities of mortality. And as a new homeowner high on the joy of owning a property to your name, unfortunate events surrounding death are perhaps the last thing on your mind. However, as someone responsible for your family’s well being, it is important that you factor in all kinds of situations, unprecedented events included. So, the big question: What happens to a home loan if the borrower dies before closing the loan?
The emotional toll
It is sufficient to say that the death of a family member is tragic enough for their family; but if the member were a property owner, that complicates the situation a lot more. The problem becomes more financially stressful for their family if they were the sole earning member of the family. The family is ultimately faced with a lot of questions. How will the family manage to pay the loan EMI? Will the bank repossess the home for non-payment?
The SARFAESI Act
The SARFAESI Act or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) was passed by the Supreme Courts specifically for events of non-payment. AMong other things, the SARFAESI Act allows another person to stake claim on a defaulted borrower and pay their loan.
Though banks can repossess the property on non-payment and sell it to recover their losses, it is the last option for a financial institution. THe prime business of a bank is to lend money and earn profits from interests, and selling off a property goes against the core of their business. In fact, repossession and sale of a property is a huge loss for a financial institution financially speaking and it is why banks go all the way in creating win-win situations for themselves and the borrower before taking drastic steps.
Home loan insurance
Life insurance is always one of the biggest safety nets a person can offer their family. Enough has been said in the financial world about the virtues of life insurance. Another form of insurance that is gaining popularity in recent times is Home Loan Insurance. The home loan insurance offers borrowers a cover for their home loan in case of their untimely demise. It allows for financial institutions to recover the pending home loan amount directly from the insurer when a borrower passes. Most banks encourage home loan borrowers to apply for one during the home application process. Though a life insurance can cover the home loan amount, a home loan insurance leaves the family free from the burden of repayment in the absence of their dear one. It allows the family to continue to feel secure in their home with their loved one gone.
In the event of death of the borrower, the insurer scrutinizes the events of death and releases the insurance amount directly to the bank. The insurance does not cover events like natural death, death from illness, and accidental death. However, the home loan insurance does not cover death by suicide, death by alchohol abuse, death by STDs, and murder by a beneficiary.
It is important to note that financial institutions do not offer a home loan and home insurance to the same person. Typically, you will end up borrowing a home loan from one institution and get your home insurance cover from another. It will take several days for your home loan insurer to release funds in the event of death. It is the beneficiary’s responsibility to negotiate with the lender for time until they receive the home loan insurance cover.
Joint home loans
If the home loan was taken jointly, the responsibility of paying the home loan falls directly on the co-borrower or co-applicant. Joint home loans are granted to co-borrowers and co-applicants. A co-applicant may or may not be an earning member. Even if the co-applicant is a non earning person, it is up to them to repay the loan. In many places of employment, on the passing of the earning member of the family, a qualified next of kin os offered a job. This gives sufficient leeway for members of the family to repay the loan though it may leave them feeling financially constricted.
Guarantor or legal heir
If the borrower doesn’t have a home loan insurance cover, the bank looks for the next source for repayment. This can either be the legal heir of the property or the guarantor. In such cases, the bank draws a new loan contract with the guarantor or the heir taking into account their paying capacity, CIBIL score, credit profile, and financial standing. The bank considers repossession and selling of the poetry only when these steps turn out futile.
That said, banks cannot force the next of kin to repay the loan amount. However, the legal heir can claim their right to the property only after repaying the home loan amount.
What’s next for banks?
In the event of non-payment due to death, the banks will first approach the co-applicant, next the legal heir to the property, and the closest family members of the deceased. The bank then offers them options to reduce the EMI and increase tenure or reduce tenure with a higher EMI. As a final resort the bank will consider selling off the property to cover its losses.
All said and done, the importance of home loan insurance cannot be overstated and it is perhaps the safest and best way to go for a home loan borrower.
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