A loan is an obligation that needs to be paid over a long term. In case of a home loan the term can well be up to 30 years. This is a very long period. And any loan where the repayment is to be made over such long term does carry the mortality risk of the borrowers. Since the home loans in general taken in joint names, it becomes highly important for one to understand the process that would be followed in the unfortunate event of the death of one of the borrowers.
While the legal standpoint will be limited to the loan agreement in case the co-borrower passes away, the agreement does imply that all the borrowers are jointly and singly responsible to clear the outstanding loan amount in case of any eventuality. This means that the co-borrower will be responsible to pay up the loan EMI without any default if the co-borrower passes away.
Legal heirs of deceased
In case the deceased borrower is survived by the legal heirs, they are entitled to repayment of the EMI for the part that is to be inherited by them. The co-borrower in this case will be required to pay his part of the obligation. None the less, the responsibility to channelize the process with the legal heirs will be that of the co-borrower. The primary responsibility on repayment lies with the co-applicant only.
If the will is present
In a situation where the will has been left by the deceased, the bank will have to act as per the requirement of the will. The bank will have to ask the heirs to seek probate from the court and determine the extent of the liability for each of the legal heirs. In such case each of the heirs will be required to pay up the loan to the extent of the determined rights on property.
Insurance on loan
Insurance to cover the loan amount is gaining popularity these days. The new generation while applying for home loans is also signing up for the insurance. In a few cases the housing finance companies also explain the benefit of this cover and have the borrower to cover against the peril. In case the insurance is there, the loan amount can be repaid through the proceeds from the insurance claim.
Recovery through sale of property
Most banks will take this up as the last resort. Usually, the banks will ask the co-borrower and or legal heir to pay. The bank may also be willing to restructure the loan in case they feel that the co-borrower may not be in a position to continue to pay the EMI firmed up at the time of disbursal. In case they are unable to secure any of these repayment option will they initiate a legal notice followed by taking possession of the property. During this process due time is given to the co-borrower to be able to make necessary arrangements for repayment. But if the same does not happen then the bank would initiate sale of the property. The amount over and above the loan outstanding gets credited to the accounts of the co-borrower or the legal heir.
While the bank would be able to recover the amount, goes without saying that the chances of co-borrowers’ name getting updated in the loan defaulter list are very high.
Since seeking co-applicant is a safer bet from a legal stand point the housing finance companies in most of the cases ask for one.
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