Death of loan borrower? What can the family do?

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

In such cases, the untimely demise of a property owner might create many financial complications for his/her family, primarily when the deceased was servicing a home loan. The financial problems turn grave when he/she is the only earning member in the family. 

These difficult situations pose several questions to the family. What will happen if the family is unable to repay the loans? Can the bank sell a family's house if payments default due to the earning member's death? Would they auction the property? What are the options available for the family before an auction? 

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Repay to Claim Back 

The legal responsibility to repay the loan falls on the legal heir, co-applicant (if any), or the guarantor if there is no home loan protection policy. A new contract is made depending on the payment capacity, financial standing, and credit profile of the person repaying the loan. If these methods don't work, the bank will have to resort to selling the property, recover its losses, and pay the profit share to the legal heir. 

The bereaved family must convey to the bank if unable to repay the loan or arrange for an EMI repayment. In such cases, the bank usually tries its best to restructure the loan (by reducing the EMI payment and increasing the loan tenure). It would also provide enough time and flexibility to pay back the loan.  

Ideally, one should approach the bank and ask for a debt restructure with a 3-6-month moratorium or make a one-time payment based on his/her financial flow. 

Another alternative is to pass the loan on to other legal heirs with a steady income. The bank will be flexible and adjust loan terms based on the new homeowner's repayment capabilities. In some cases, a few banks also have an option of EMI holidays provided in exceptional circumstances. However, this entirely depends on the bank. 

It is to be noted that the legal heir cannot have any claims to the property till the debts are paid in full. At the same time, the bank cannot force the legal heir to pay off the loans. They try to empathise with the situation and work out a repayment period best suited for both parties. 

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Repossession is the last resort 

Meanwhile, you need not fret, for the lenders choose repossession of property only as a last resort. Financial institutions are in the business of lending and earning profits from the interest levied, so banks will try to establish that the borrower can repay the loan. 

Lending institutions offer co-borrowers and legal heirs enough time before seizing possession of the property. Only after the borrower's account has been late for 90 days, the bank will label it as a non-performing asset (NPA). 

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

Defaults are bad for banks as property repossession becomes the worst-case scenario. There are instances where they have been unable to auction the borrower's assets. For example, banks have not been able to recover losses from the property auction of Vijay Mallya and Sahara Group's Subrata Roy. 

However, repayment becomes easier if the borrower has taken home loan insurance or term insurance while availing it. 
 
Insurance to the rescue 

When availing of a home loan, banks provide one with the option to buy a home loan insurance policy. It covers the risk of the borrower's death and offers temporary relief to the family; the insurance company repays the remaining loan amount to the bank. However, there is a catch. 

The insurance covers the amount only under natural and accidental death circumstances. Under the home loan insurance policy, the sum assured reduces with the loan amount, so, in the case of premature death of the borrower, the insurance company will pay the outstanding amount to the bank. 

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

For example, if you have a home loan of Rs 50 lakh, the sum assured under the term insurance policy should also be Rs 50 lakh. The borrower's family gets the entire Rs 50 lakh, irrespective of the amount repaid, thus helping the family repay the loan and take care of other needs.
 
(The author is Co-founder & CEO, BASIC Home Loan.)