As a self-employed professional, the best part is that you are your own boss and have the power to do things your way. You not only make independent decisions but do the kind of work which you always wanted to. However, all this also comes with its own set of challenges. One such challenge is qualifying for a loan which can prove to be easier said than done.
Let’s face it, getting approved for a loan isn’t easy, let alone a Home Loan. Add to the mix, that you’re a self-employed individual and the whole scenario gets a whole lot trickier. Self-employed professionals do not have it easy when it comes to getting a Home Loan approved. Not only does it usually entail more documentation –compared to salaried individuals, but the qualification process is also more complex. Self-employed individuals can be bifurcated into two categories:
- Professionals – include doctors, lawyers, engineers, architects, CAs, MBAs, etc., who are academically qualified and have set up their own businesses or practice.
- Non-professionals – include merchants, traders, small-scale business owners, contractors, commission agents, retailers etc.
In most cases, self-employed people are unable to qualify for a Home Loan, as they are unable to clear the lengthy, due-diligence protocols banks have set in place. Thus, banks do not see them as creditworthy.
It is imperative to understand the rules on how to crack a Home Loan application when you’re self-employed. Without further ado, here are four key factors – which we have compiled – that are taken into consideration by financial institutions at the time of sanctioning loans to self-employed individuals.
- Individual’s Profile
Where you work and what you do is one of the primary factors taken into consideration at the time of appraising a Home Loan application. This is because repayment capacity is gauged depending on the income of the person. The bank usually assesses the individual’s profile thoroughly at the time of sanctioning the Home Loan. To that effect, it’s been usually observed that professionals such as doctors, lawyers, engineers, etc. who have professional qualifications find it easier to get their loans approved.
This is because the lender deems this category of people to have the necessary skills and domain knowledge required to put them under the trustworthy category. On the other hand, in case of self-employed non-professionals, such as real estate agents, traders, consultants with commission income, etc., the chances of getting a loan approved are bleak because they don’t have a steady income source as they work in cyclical sectors.
The bank or lender believes that the nature of their job increases the chances of them defaulting on loan repayments. Due to the inconsistent income every month, the best-case scenario for these professionals is getting offered a loan at a higher interest rate. Another possible loan-approval solution for these individuals would be putting down a significant amount in the form of a down payment to make sure the outgoing EMI is small.
Other parameters which are assessed include the applicant’s age: the younger, the better; and the number of dependents the applicant has: lower the dependents the higher is the applicant’s disposable income.
- Income Stability and Records
Many self-employed individuals make the cardinal sin of not maintaining bookkeeping records. However, the truth of the matter is that by keeping Balance Sheets, Profit and Loss Accounts, Income Tax Filings, and other financial papers, you automatically improve your chances of getting your Housing Loan approved.
If you’re looking to get the best Home Loan such as TATA Capital Home Loan, ideally you should be able to furnish IT returns for 3 years along with at least 2 years’ audited Profit and Loss Account Statements and Balance Sheets. In that light, submitting these documents drastically increases your eligibility for procuring higher loan amounts as well. These documents are required to verify the stability of your income, to ascertain how much you earn, and to confirm whether you are capable of paying the EMIs.
Documents which are required for Home Loan include:
- Property documents (Copy of the Property Purchase agreement)
- KYC documents to verify your identity, along with residence and age proofs.
- Income Tax Returns (ITR)
- Statement of current year’s loss or profit
- Certified financials of last 6-12 month’s bank statement
- Education qualification certificates
- Details of the co-applicants’ income
- Professional practice certificate
- Form 16A or Tax deduction certificate
- Your Ability and Skills
It’s quite difficult for Start-Up owners to get their loans approved as banks or lending institutions usually look at a minimum of three successful years of business operation before approving a Home Loan. Thereon, income evaluation is a major criterion for a Home Loan approval and because Start-Ups have little or no profits to show, the chances of getting a loan approved are slim. However, lenders do make an exception in some cases, i.e., when you have a sound business plan and sound entrepreneurial ability, you might just get a look in. Most importantly, lenders analyze your ability to generate income and assess if you have a track record of good turn-over and profitability from your business. Just ensure that you maintain books, and keep records of all the profits and losses over the years.
- Credit History
Lenders always prefer individuals with clean financial habits such as good credit history. A credit score speaks volumes about your financial health, which is why you must regularly monitor your credit scores to make sure you’re maintaining a high score. While a score of 800 is considered to be a great score, scores within 700 to 800 range are also considered decent enough to get loan approval.
However, self-employed professionals with scores below 650 might find it tough to get a loan application approved. While it will still be possible to qualify with a low score with select lenders, but that would attract a fairly high-interest rate in return. Simply put, the likelihood of Home Loan approval is greater if your score is higher. In addition, the lender will also look at your existing debts such as Credit Card bills or if you are servicing Personal Loans, Commercial Property Loans, or Loans of any other nature on your account. In that regard, ensure that you lower your existing debt as it greatly increases the chances of getting a Best Home Loan approved.
The Bottom Line
Getting a Home Loan when you’re self-employed can be a challenge, but it is very much achievable. However, you must be prepared to combat the extra challenges and tackle the additional documentation requirements to improve your odds. You can even try to shorten your loan period if you’re finding approval is getting difficult or possibly try getting a loan from a bank where you have had a previous relationship. Last but not least, do try to maintain a stable and adequate source of income while building up a good credit score, and you will significantly improve your chances of securing a Home Loan.