There are several factors which a bank will consider before it agrees to loan you money and if one is self-employed and does not have a fixed or steady income each month, things could become a bit difficult. Banks often do not find these kinds of customers creditworthy and it becomes far more difficult for them to get their loan sanctioned. Self-employed people, especially those working with startups, go through an initial period of unsteadiness and hence fluctuating income can result in the bank rejecting the loan application. The home loan application process tends to become lengthier and more prolonged for self-employed people in comparison to salaried individuals.
Certain documents have to be provided for getting a loan sanctioned. Photo ID and Age Proof, Address Proof and the IT return for the last three consecutive years, which is the same for all. For salaried people, one would have to provide the salary slip of the last six months and the bank statement of the last three months. Those who are self-employed or have their business will have to provide the TAN as a business proof, along with sales tax documents and PAN. Apart from these, the creditors could ask for any other documents as per their requirements like educational and professional documents.
Some things to keep in mind
Thankfully, some things have become easier for self-employed individuals. They can evaluate their own loan profile with the help of technology and financial institutions are also looking forward to catering to an underserved market and they are coming up with specific schemes and loan products that are designed specifically for those who are self-employed. The loan tenure is further enhanced for those with their own business and can be as long as 30 years.
Earlier, even if banks did sanction home loans to self-employed people at times, it was to those who had a specific domain like being a doctor, a lawyer, engineers, or a self-employed chartered accountant, in other words, self-employed professionals. Those who were working in eclectic fields often found it difficult to get adequate financing like fashion designers, painters, contractors, and consultants. Banks find that their chances of defaulting on payments are rather high and even if they are offered a loan, the rate of interest is very high.
How to maximize the chances of sanctioning a home loan for a self-employed individual?
One of the ways to ensure that the lenders do not reject the home loan application is to show that the company has had three, or at least, two years of ascending profit. Too many home loan rejections can put off further lenders for good so it better to be prepared fully before you start applying. Even if your startup has capitalists investing in the business but there are no profits to show as yet, it is likely that the home loan application will not be approved. It is a far better idea to wait for a couple of years for the numbers to increase and then start applying for the loan because banks will not simply rely on the assumption that the company will reap profits in the future. The business must show tangible net profits and growing net worth.
Next, it is also important to keep up with all the payments. Even if you do not have any EMIs as such, make sure all your bills and other payments pertaining to business are on time, including credit card bills. These will help build a sound credit score which is far greater consequence to a self- employed individual as a marker of his financial stability. Some lenders will sanction a home loan with a credit score as less as 650 but the interest charged will be extremely high and it would take a lot of convincing. The banks will also delve into repayment history, bad accounts and whether any credit account has been settled or written off, which would show that the loan was not repaid on time.
Banks will meticulously check whether your monthly income will be enough to cover your EMIs and this will be done by eliminating the mandatory expenses, known as a fixed obligation to income ratio. For self-employed individuals, about 50 to 60% of the income is considered for EMIs and if the percentage has to be increased, one should close any existing loan like a car loan or a personal loan.
It is important that self-employed people pay greater attention to financial planning if they are to acquire assets over time. Saving enough money initially to pay for a down payment will decrease the amount of loan that has to be taken and that will also help with the EMIs and the future monthly expenses in the long run.