What Happens to Home Equity Loan When Someone Dies?

It is important to stay aware of some common aspects and rules before taking a home equity loan. Today we are going to talk about what happens to home equity loans after death. Whether you have already taken out a loan or are planning to do so, you should stay aware of this aspect too, as it will keep your family out of any issues in future. 

Introduction

Apart from causing a great deal of personal loss to the family, the untimely death of a property owner might also produce financial problems if the deceased was servicing a mortgage. Those who were the sole earning members of the family face greater difficulties.

Can you pay the EMI if the family cannot afford it?

Banks sell off properties to recover their losses and leave the family searching for a new home while dealing with their losses?

However, the bank can reclaim property and sell it to recover losses by using the powers provided by court rulings. 

If the property is not rented or sold, the financial institution must take possession. The company’s primary goal is to lend money and earn profits, not resort to desperate measures like real estate auctions. “Banks pay dearly for these items and that is why they look for agreements that are advantageous for the borrower’s family and themselves,” says a high-ranking banking official in a public sector bank, who asked to remain anonymous. The bank and the family of the deceased do not have any other options as the property will be auctioned at the last minute. What are these other options?

 Explaining Home Equity Loan

As part of a home loan, banks typically require borrowers to obtain home loan insurance (not to be confused with home insurance). A home insurance policy covers your home and its contents in the event of a natural catastrophe, etc. A home loan insurance policy covers the risk of fatalities caused by natural causes.

Families of deceased homeowners may find some relief through a home loan insurance policy purchased together with the loan. When this happens, the insurer will pay the remaining amount to the bank and free the family’s property from all financial obligations. 

Possible ways to pay pending home equity loan

Above we had discussed much what happens to a home equity loan if a borrower dies. Below are some possible ways which people can approach to pay off the home equity loan:

  • Taking Over the Loan

Families with a home equity loan on their house who are still living there can take over the loan. This must be cleared with the lending institution by the surviving family members. Family members may simply start making payments on the loan. There may be instances where a lender requires that family members refinance the existing loan and pay it off.

  • Selling the Home 

You can also sell your home to pay off your debts so that your heirs can have peace of mind. A lender will simply foreclose on and sell your home if you have no family members to inherit it. You can sell your house to your family members, who can use the proceeds to pay off the home equity loan and any other debt. This option can help individuals eliminate a few debts and get a fresh start, even if they are not necessarily looking to keep the house.

  1. Credit Insurance

It is possible to buy credit insurance when taking out a home equity loan. Combined with your mortgage, this form of insurance pays for the debts you owe if you pass away. In this case, the insurance company will pay off your home equity loan when you die. Thus, your beneficiaries will be able to enjoy the property debt-free.

Your estate will be settled by an executor or administrator after you pass away. Paying off any outstanding debts is part of this process. The estate must pay off all outstanding debts to be able to distribute any assets to beneficiaries. Any remaining assets in the estate will be used to pay off a home equity loan if you have one.

As a general rule, however, only certain circumstances would prompt the insurer to do so. The following are among them:

  • An unnatural death occurred to the deceased

Typically, if a person commits suicide or dies naturally, the insurance company will not cover the loss.

  • The loan was not taken jointly

Co-applicants will be responsible to pay the EMI if the loan was taken jointly. A co-applicant does not need to be earning to be eligible, even if she is a homemaker. Since you would typically be dealing with two separate companies, the home loan provider and the home loan insurer, it would take at least a day before you are able to get the money out of the home loan insurance policy to pay the bank in full. In that case, negotiate with the bank. 

  • The repayment of the loan by co-applicants, guarantors or legal heirs

Due to the lack of home loan protection policies, it would be the co-applicant (if it is a joint loan), the guarantor (if one exists) or the legal heir responsible for repaying the mortgage. According to the owner’s payment capacity, credit profile, and financial standing, the bank will issue a new loan in his name. A bank would sell the property if neither of these methods work, recover its losses and pay up its share of the profit to the heirs.

Likewise, it should be remembered that the legal heirs of the property will not be able to lay any claim to the property until all the deceased’s debts have been paid. It is illegal for banks to compel the next of kin of the deceased to pay the debt. The banks respond to genuine cases with empathy and try to work out a solution. Bank officials must be informed of the borrower’s family’s problems right away. During such times, banks do not take hostile action against clients,” the official adds.

 In the absence of home loan insurance, what would the bank do?

When a home loan borrower dies without home loan insurance, these are some of the common occurrences:

  • Family and co-applicants: The bank will request information from the deceased’s closest family members in order to determine if any of them will be able to repay the loan. The banks also encourage people to get joint mortgages because of this reason. It is possible for them to deal with the other co-applicant if someone passes away too soon. They can now do business more easily. When people are willing to repay the outstanding loan, banks consider that a best-case scenario.
  • Help you make choices: In the event that all close family members are unable to cope with home loan EMIs, the bank will think about what options it can offer the family of the late borrower.

Concluding the Facts

  1. To reduce EMI expenses, the tenure could be increased. As a result, a longer period of time is needed to repay the loan, but it would be less burdensome on the family on a monthly basis.
  2. For the purpose of recovering its debt, the company would sell the property on the open market as a last resort. Amounts earned above what the late borrower owed will be returned to the borrower’s family if the sale of the property results in an increased amount.
  3. In this case, the EMIs could be increased for the deceased’s family to shorten the tenure.

So, here was all about what happens to home equity loans when someone dies, stay continued with us for more insurance based updates and information like this. 

Also Read

How Many People Can Be on a Home Loan?

What Happens to Unused Home Loan Money?

 

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