What happens to the remaining loan after the death of the home loan borrower?

Taking a home loan to build your own home is a normal financial process, but when the main earning member of the family (primary borrower) dies suddenly, the family faces an emotional shock as well as a serious financial crisis. At such a time, the biggest question that arises is whether the bank waives off the remaining EMI, or the burden falls on the shoulders of the wife, children and legal heirs. Under the banking and financial laws of the country, no bank or housing finance company (HFC) automatically waives the loan on the death of a person. Home loan is a secured loan, against which the original documents (Registry/Sale Deed) of the concerned property are mortgaged with the bank. In such a situation, banks use many legal provisions to recover the loan.

In most of the cases, people think that the bank will waive off the loan on sympathetic grounds, but the reality is that the loan can be ‘waived off’ or void only if the principal borrower has committed the same at the time of taking the loan. Home Loan Protection Plan (HLPP) or any adequate term insurance plan Have taken it.

1. Home Loan Protection Insurance (HLPA): If such insurance is taken along with the loan, then in the event of untimely death of the borrower, the insurance company makes a lump sum payment of the entire principal amount outstanding with the bank. After this the bank ‘closes’ the loan account and hands over the property documents to the family and issues NOC.

2. Term Life Insurance: If the person had a separate term plan of Rs 50 lakh or Rs 1 crore on his life, then the insurance claim amount comes directly into the account of the nominee (wife or child). The nominee can make the house debt free by paying off the bank dues with that money.

If no insurance cover is present, there is no legal provision for loan waiver and the bank starts the process of recovering the liability.

If there is a co-applicant/co-borrower or guarantor in the home loan, the entire legal liability immediately transfers to the co-borrower after the death of the primary borrower. Generally husband and wife apply jointly (Joint Home Loan). In such a situation, if the husband dies, the wife becomes the main debtor in the eyes of the bank and has to continue paying EMIs regularly. If there was a guarantor in the loan, the bank can force the guarantor to repay the dues by sending a notice. As long as the co-borrower or guarantor continues to pay regular EMIs, the bank does not take any penal action on the property.

If the loan was in the name of the deceased alone and there was no co-applicant, the legal heirs of the property (wife, son, daughter or parents) are contacted under Indian succession law. Here the law strikes a very clear balance: the loan cannot be recovered from the personal property of the legal heirs or their personal earnings. Legal heirs are liable only to the extent they inherit property from the deceased.

• Option 1 (ownership after repaying the loan): If the family wants to save the house, they can request the bank to restructure the loan in their name and continue the EMIs.

• Second option (inability): If the legal heirs are completely unable to pay the EMI, they can voluntarily give their consent to the bank to sell the house so that the loan can be repaid and the remaining additional amount can be given to the family.

If the family does not pay the EMI for 3 consecutive months (90 days) after the death of the borrower, the bank declares that loan account as NPA (Non-Performing Asset). After this the bank SARFAESI Act, 2002 (SARFAESI Act) Initiates legal process of recovery under:

1. 60 days demand notice: The bank sends a formal legal notice of 60 days to the heirs to repay the outstanding amount.

2. Possession Notice: If payment is not made within the notice period, the bank takes action to take symbolic or physical possession of the property.

3. Public Auction: The bank decides the reserve price after getting an independent appraisal of the property and publishes an advertisement for the auction in newspapers. Whatever amount is received from the auction, the bank recovers its principal, interest and legal expenses. If the auction amount exceeds the total dues to the bank, the remaining excess amount is returned to the bank account of the legal heirs of the deceased.

If such a tragic situation arises in the family, instead of panicking or hiding from the bank, transparent and quick steps should be taken:

• Notify the Bank immediately: Inform the bank branch manager about the situation in writing along with a copy of the death certificate.

• Check Insurance Policy: Check the loan sanction letter, bank statements and old documents to see if any single-premium insurance was taken out with the loan. If yes, file a death claim with the insurance company immediately.

• Ask for time from the bank (Moratorium/Restructuring): If the family is financially capable but the process is taking time, then apply to the bank for a grace period of 3 to 6 months or to reduce the monthly installment by increasing the tenure of the EMI.

• Choose the option to sell yourself: If it is impossible to repay the loan, then instead of waiting for the bank’s forced auction (which often fetches lower prices for the property), get the written consent of the bank and sell the house in the open market at a good price, repay the bank loan and keep the remaining amount safe for the family’s future.