You may have been eyeing a stunning real estate property in Kolkata, but be forewarned that if you are an entrepreneur or self-employed individual, getting a home loan will not be smooth sailing.
It is because the main consideration for lenders and bankers is the stability and consistency of the business owned by a self-employed individual since it reflects his/her capacity to repay the loan.
So leave all your worries behind and continue reading this blog to arm yourself with the required knowledge.
Challenges faced by a self-employed individual in acquiring a home loan
- Mortgage lenders favor income that is consistent, stable, and ongoing – This poses a problem for a self-employed individual whose business is seasonal, which implies that the company lacks a consistent monthly turnover or it does not generate earnings all year round.
- Financial institutions prefer lending to professionals instead of entrepreneurs – The financial institutions are more kind in the documentation process with the professionals such as doctors, chartered accountants, company secretaries, lawyers, and engineers as compared to entrepreneurs working in jewelry, real estate sectors, trading, contractors, consultants/advisors with commission income, etc. The lenders change the terms and conditions according to whom they are dealing with. This is because the former has a more steady income than the latter.
- Lending institutions offer home loans at higher interest rates to self-employed non-professionals – Self-employed borrowers have to provide more paperwork with documented income as compared to traditional employees who can get away with a Wage and Tax Statement (W-2). Since the document verification process is lengthy and time-consuming, the interest rates and processing rates are higher than usual.
- You are not qualified for a home loan if you are self-employed for less than a year – You are required to establish your company for at least 3 years with two years of rising cash profits, revenue, and tangible net worth before applying for a home loan. You have to convince the loan assessor that your income will continue for a minimum of 3 years even after shutting down operations. However, the 3-year rule does not always hold good. You might have been self-employed for one year, but you need to prove two years of experience in a similar line of work. Moreover, you must demonstrate that the new role provides an equal or greater income than the previous traditional job. Some lenders even consider one year of related employment plus one year of formal education or training as acceptable work experience.
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Documents Required for Home Loan by a self-employed individual
A self-employed person must be prepared with the below listed compulsory documents before approaching a financial institution to get his/her loan sanctioned –
- KYC documents including your identity proofs.
- Last three years’ income tax returns statements (ITR) and audited financial statements (attested by a chartered accountant)
- Statement of current year’s loss or profit
- Last 6-12 month’s savings and current bank account statement
- Education and professional qualification certificates
- Co-applicants income details
- Form 16A or Tax deduction certificate
Some tips to improve your chances of getting a home a loan
- Make a higher down payment as you will be viewed as less of a risk during a financial crisis by the bank.
- Have a higher credit score to qualify for the home loan and avail a lower interest rate.
- Repay off all your dues, bad accounts, etc. Also, close any ongoing short-term loan such as a car or personal loan. This will increase the sanctioned amount as you will have more cash flow.
- Show substantial savings in an emergency fund as an assurance so that even if the business ceases to exist, the lender will continue making the monthly payments.
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We hope the above information will make your home-loan-approval a cakewalk. After all, nothing deserves to get in the way of you and your dream home.