Death of a borrower? What can the family do?

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We have all encountered deaths of near and dear to Covid-19, making this pandemic probably one of the worst human tragedies of years to come.

In such cases, the premature death of a homeowner can create many financial complications for their family, especially when the deceased was dealing with a home loan. Financial problems become serious when he is the only earning member of the family.

These difficult situations raise several questions for the family. What will happen if the family is unable to repay the loans? Can the bank sell a family’s home in the event of default due to the death of the salaried member? Would they like to auction the property? What options are available to the family before an auction?

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Refund to claim

The legal responsibility to repay the loan rests with the legal heir, co-applicant (if applicable) or guarantor if there is no home loan protection policy. A new contract is concluded based on the payment capacity, financial situation and credit profile of the person repaying the loan. If these methods do not work, the bank will have to resort to selling the property, recovering its losses and paying the share of the profits to the legal heir.

The bereaved family must pass on to the bank if they are unable to repay the loan or arrange an EMI repayment. In such cases, the bank usually does its best to restructure the loan (reducing the EMI payment and increasing the term of the loan). It would also give enough time and flexibility to repay the loan.

Ideally, one would go to the bank and ask for a debt restructuring with a 3-6 month moratorium or make a one-time payment based on one’s financial flows.

Another alternative is to pass the loan on to other legal heirs with a stable income. The bank will be flexible and will adjust the loan conditions according to the repayment capacities of the new owner. In some cases, a few banks also have an EMI holiday option provided in exceptional circumstances. However, this entirely depends on the bank.

It should be noted that the legal heir cannot have any right to the property until the debts are fully paid. At the same time, the bank cannot force the legal heir to repay the loans. They try to understand the situation and determine the best repayment period for both parties.

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Recovery is the last resort

In the meantime, you don’t have to worry, as lenders only choose repossession as a last resort. Financial institutions are in the business of lending and making a profit from the interest earned, so banks will try to establish that the borrower can repay the loan.

Credit institutions offer co-borrowers and legal heirs sufficient time before taking possession of the property. Only after the borrower’s account has been 90 days overdue will the bank mark it as a non-performing asset (NPA).

The bank will then send a written formal notice to the co-borrowers, asking them to pay their debts within 60 days. If the bank does not receive an appropriate response within 30 days of sending it, it will proceed with the public auction of the asset.

Defaults are bad for banks because repossessing property becomes the worst-case scenario. There are instances where they have been unable to auction the borrower’s assets. For example, banks were unable to recoup losses from the real estate auction of Vijay Mallya and Sahara Group’s Subrata Roy.

However, repayment becomes easier if the borrower has taken out home loan insurance or term insurance while taking advantage of it.

Insurance to the rescue

When obtaining a home loan, banks offer the possibility of taking out a home loan insurance policy. It covers the risk of death of the borrower and offers temporary relief to the family; the insurance company reimburses the balance of the loan to the bank. However, there is a catch.

The insurance covers the amount only in the event of natural and accidental death. As part of the mortgage loan insurance contract, the sum insured decreases with the amount of the loan, thus, in the event of the premature death of the borrower, the insurer will pay the amount remaining due to the bank.

In the same way, there are term insurances that can offer protection against the unpaid amount of the loan. In the case of term insurance, the sum insured remains constant.

For example, if you have a home loan of Rs 50 lakh, the sum insured under the term insurance policy should also be Rs 50 lakh. The borrower’s family receives the full Rs 50 lakh regardless of the amount repaid, helping the family to repay the loan and take care of other needs.

(The author is co-founder and CEO, BASIC Home Loan.)

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