What Happens if One of the Co-applicants Passes Away During the Home Loan Tenure?
A home loan is a long-term investment stretching up to 30 years at times. Now, anything can happen in 30 years. The borrower can die during the Home Loan Tenure. In the case of a joint loan, one of the co-applicants may expire. What will happen if you come across such a situation? Let us go deep into the matter and discuss the options available to the borrower and the banks under such circumstances.
The Legal Position
Go through the Home Loan agreement carefully. The banks are within their rights to recover the loan amount from the legal heirs of the borrower in the case of death of the borrower. If there is more than one borrower, the surviving borrowers and the legal heirs of the deceased co-applicant are liable for the repayment of the Home Loan.
In the event of the surviving borrowers and the legal heirs of the deceased not being able to repay the Home Loan, the bank has the option of invoking the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) proceedings and recovering the amount from the sale of the asset.
The Practical Position
Invoking the SARFAESI Act proceedings is an available option, but the banks prefer to exhaust all other options available to them. These options include:
- Letting the surviving co-applicant service the Home Loan instalments
- Explore possibilities of restructuring the loan instalments depending on the residual Home Loan tenure and the repaying capacity of the surviving borrower.
- Getting the legal heirs of the deceased borrower on board the Home Loan by executing a fresh set of documents.
- Obtain the income particulars of the legal heirs and arrive at a new repayment schedule if required.
The Insurance Option
Nowadays, Home Loan insurance has become a favourite option. Most of the banks and NBFCs offer this option to their Home Loan borrowers at the time of the sanction of the Home Loan. Usually, this option is only available to the principal borrower of the first applicant. In case of joint loans, you have to expressly mention whether you would like to add the names of all the joint borrowers for the insurance cover. Under such circumstances, the premium payable will increase proportionately.
Check out the insurance policy document whether it covers the lives of all the co-applicants. If it does, you can claim the amount from the insurance company. It takes care of the repayment of the Home Loan. If the principal borrower (who is also the insured person) dies, the nominee can claim the insurance amount. The insurance company has to pay the sum assured to the bank according to the amortisation schedule attached to the insurance policy.
Therefore, you should look into these options when you apply for a Home Loan online.
The Responsibility of the Surviving Co-applicant
The surviving co-applicant must inform the bank about the death of the joint borrower to the Home Loan. The survivor should explore whether the co-applicant had taken the insurance cover. If the cover is available, it is the duty of the surviving co-applicant (usually the nominee in the policy as well) to inform the insurance company and claim the amount as listed in the amortisation schedule.
The surviving co-applicant should explain the plans of repayment to the bank. The banks are there to help you under such circumstances. There are various options available. The bank does not rush to invoke SARFAESI Act proceedings immediately on the receipt of the notice of the death of the co-applicant.
In the ordinary course, the co-applicants are members of the same family. The surviving co-applicant can also be one of the legal heirs of the deceased borrower. The surviving co-applicant also must produce the copy of the will (if any) executed by the deceased. Under such circumstances, the treatment of the loan account is different.
In Case of Presence of Will
The deceased borrower could have prepared a will bequeathing the properties to the legal heirs and so on. Under such circumstances, the bank should ask the legitimate heirs to obtain probate from the court. It is the responsibility of the bank to act as per the terms of the will. The banks should coordinate with the executors of the will and formulate a plan of action for the recovery of the Home Loan. The bank might also have to stop the operations in the Home Loan account and accept repayments if any in a separate account. It is to determine the liabilities of the surviving legal heirs of the deceased and prevent Clayton’s rule from coming into effect.
Having insurance cover in the names of all the joint borrowers (or the primary earning member) is the best option of all. The insurance company takes care of the loan repayments. The bank is happy, and so are the co-borrowers.
Also Read: Are You Eligible for PNB Housing Loan?
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