Can one opt out of Joint Home Loan? Yes! Here’s how?

Home Loan is provided by financial institutions such as Banks or Non-Banking Financial Companies (NBFC) based on the eligibility of the applicant calculated after assessment of the applicant’s repayment capacity as well as some technical and financial aspects of the property being bought.

It is a common practice to the club two or more borrowers for a home loan for enhancing eligibility. When two or more people jointly apply for a home loan, the total income of the applicant and co-applicants combined is considered, and the eligibility for home loan increases.

In the majority of the cases, such joint Home Loans are taken with the spouse as the co-applicant. As this a joint application, the EMIs are paid by both the applicants in proportion to their incomes, and tax benefits on that Loan (Link to the article on Tax Benefits on Home Loan and Pre-EMI) are also availed for the same.

Moving out of a Joint Home Loan:
There may be some unforeseen circumstances, where servicing of the Home Loan EMI by one applicant is not possible (death or permanent disability), or not desired (separation or divorce)

1. Death of one applicant: In the case of the death of one of the applicants, the other applicant can either choose to pay the EMIs of the deceased applicant’s share as well; or let the bank sell off the property and recover the outstanding amount.

Case 1: The Home Loan is insured
In case the applicant has opted for Home Loan Insurance while taking the Loan, the insurance company pays the outstanding amount to the lender for the deceased applicant’s share, and the other applicant may continue paying his/her share of EMI till the tenure of the loan.

The surviving applicant may also get the loan restructured based on his/ her repayment capacity. This is at the discretion of the lender.

Some insurance policies may also cover permanent disability, depending upon the additional covers purchased by the applicant.

Case 2: The Home Loan is not insured
If the applicant has not taken insurance on the Home Loan, then the entire responsibility of repayment of the Home Loan is on the other applicant. Now, if s/he is financially well-off and capable of paying the EMIs for the deceased applicant’s share as well, banks may allow him/her to do so.

However, if paying the whole EMI is not possible for the other applicant, the lender would seize the property, auction it, and recover the outstanding amount.

2. Separation of the Partners: An incident of separation such as divorce is the least thought of while taking a joint Home Loan. In the case of separation of partners, the responsibility of repaying the Home Loan is of both the co-applicants.

To be honest enough, the lenders are only concerned about the timely repayment of the Home Loan, and not the condition of the marriage of the co-applicants.

In the case of divorce, there are two major options for the applicants:

1. Sell the Property: It is the easiest option for getting out of the joint Home Loan. Sell the property, pay the outstanding loan amount to the bank, and close the Loan account.

Under this, inform the bank that you both won’t be able to pay the EMI, and obtain a No Objection Certificate (NOC) to sell the property.

2. Property Takeover by one applicant: This option requires ownership transfer from joint-ownership to a single owner.

In this, one of the co-owners of the property takes full ownership of the property by paying the other owner’s share of the property, based on a mutually agreed-upon amount. After this transfer, the bank refinances the property in the new owner’s name based on his/ her repayment capacity.

Now, this does not seem exactly as simple as it sounds. It involves following some legal procedures, and payment of the legal charges as applicable.

One of the major procedures is the Quit Claim Deed to be executed by the party who would receive his/ her share of the property and wishes to opt-out of the said Home Loan.

As the name suggests, a Quit Claim Deed is a legal document furnished by a person or any other entity by which s/he surrenders his/ her interest in a shared property, and terminates any claim on the mentioned property by that entity. So, this person would not claim any right whatsoever, on the property mentioned in the document.

A Quit Claim Deed needs to be duly notarized

Apart from this, there may be various other forms, affidavits, legal documents, etc. required by the lenders, and may vary with each lender. It is highly advised that you take adequate legal advice from a lawyer, should you happen to land up in such a situation.

It is also to be noted that co-applicants of a Home Loan are also liable to repay the Home Loan in the case of default by the applicant, even though they do not own the property.

Co-applicants of a Home Loan need not necessarily be the co-owners of the property. But, co-owners of the property need to be co-applicants of the Home Loan.