What Will Happen to a Home Loan If the Borrower Passes Away?

A housing loan is a large ticket credit facility in which you may need to choose a longer tenure to repay your obligations comfortably. While you apply for a home loan, you may wonder what hardships your family may face in case you pass away before completing your repayment. 

Such mishaps can miserably thwart the financial stability of your family, especially if you are the sole breadwinner. This is because, after your death, your lender may try all possible ways to get back its capital.

Things that Follow after the Demise of Home Loan Borrower before Tenure

In case of your sudden demise during your repayment tenure, your lending institutions can undertake the following procedures one after another to recover the lent amount:

• Lender Checks for Home Loan Insurance Plan

Lending institutions first of all checks whether their borrowers have any active home loan insurance plan. If they have, the nominee or beneficiary of that deceased borrower gets a lump sum to repay the existing loan amount. The insured sum can be equal to the outstanding loan amount or there may be an upper cap to it, depending on the terms and conditions of the plan. 

This way, with a home loan insurance plan, it becomes extremely easy for borrowers' families to meet the due obligations. Resultantly, their family members can continue their stay at their houses. Hence, it is important that when you apply for a home loan, you should also ideally get an insurance plan against it as well. 

• Lender Approaches Co-Applicants

Some borrowers may not have a home loan insurance plan. In such a scenario, lending institutions contact the co-applicant of the deceased borrower, in case it is a joint home loan. The onus of repayment goes on to that co-applicant. In absence of any co-applicant, lenders reach out to legal heirs or family members to inform them about the outstanding home loan balance. If they agree to repay, lenders can make changes in the existing loan term. For example, they can extend the tenure, to make repayment easier.

• Lender Sells off the Property

Lending institutions can take the harsh decision to sell off the home through auction in case the co-applicant or family members disagree or fail to repay the loan. From the amount of that sale, they first recover the outstanding loan amount and then return the excess amount to family members. Before all these, however, they give a sensible notice period to residents for vacating that house.

However, if a co-applicant or any family member agrees to repay, the lending institutions form a new financial contract with the concerned individual. They need to start repaying as per the newly agreed contract. After the repayment is over, the financial institution returns the property deed to the original borrower's legal heirs.

So, to take care of the financial interest of your family, you can get a home loan insurance plan. As a result, your unfortunate demise before repaying your loan will not push your family into financial hardships. Besides this plan, there are several other aspects that you will have to bear in mind before taking a home loan.

Things to Consider When You Apply for Home Loan

Following are some factors that you need to check before taking a home loan:

• Repayment Period: Tenure or loan repayment period influences the installment amount. In a loan with short tenure, you will have to repay with a high premium amount. As a result, it may become financially challenging for you to pay off your monthly installments. You can use an EMI calculator while you apply for a home loan. It will help you understand your installment amount for a chosen tenure.

• Housing Loan Interest Rate: Interest is the largest component of the total borrowing cost in a home loan. You need to ensure that your lending institution is offering a comparatively lower housing loan interest on a home loan. To get such a loan offer, the first thing that you will need to do is undergo a thorough market research.

• Processing fees and Other Charges: Processing fees and other charges, such as late payment fees, conversion charges, prepayment charges, etc., also increase the overall borrowing cost. To ensure that your loan remains cost-effective, you need to ensure that these charges are lower compared to other lenders.

• Eligibility Criteria: Eligibility criteria let you understand whether you will be able to secure a home loan from a particular lender. It consists of several parameters, including your age, annual income, working experience, etc. To qualify for the loan without any difficulty, you need to meet those parameters properly.

• Required Loan Amount: Knowing how much loan you will need to complete the construction project of your home is essential. In case the loan amount is insufficient, you may have to borrow again, which may be difficult to procure. Lenders can deny your loan requests, seeing that you already have an ongoing loan. 

The unfortunate death of home loan borrowers can put their families under additional financial burden. Despite the loss of family income, their legal heirs need to pay off the outstanding debt. When you apply for a home loan, you should ideally bear this aspect in your mind and purchase an insurance policy against your loan. It will help you ensure that your family stays away from financial challenges, even after your unfortunate demise before repayment.