Buying a home is a big decision, it is a big-ticket purchase and most often home buyers need to opt for home loans to cover the cost of buying their dream home. The paperwork involved for getting the home loan gets a tad bit more stringent if a person lists his/her source of income as being self-employed.
Typically, those who are self-employed fall into two categories:
- Professionals like doctors, lawyers, chartered accountants who have set up their own practice.
- Non-professionals like retailers, restaurant owners, agents, contractors etc who run their own business.
In both above categories, the commonality is that they cannot show a guaranteed, fixed monthly income like salaried people.
Thus, when it comes to home loans, the lenders need to be assured that the borrower will be able to pay the EMIs regularly and clear the debt. To vet a self-employed person’s eligibility for a home loan, financial institutions will consider the following:
- A business or a practice should have been in existence for at least 3 – 5 years. Banks and financial institutions are looking at long term sustainability and profitability of a business.
- Proof of income will include bank statements, Income tax returns of at least 2 years, and, in the case of businesses, proof of GST and TDS payments. Obviously, the higher the income, the higher the loan amount that will be sanctioned.
- A high credit score stands in good stead as it shows your credit worthiness, ideally it should be over 750.
- Banks will also consider the person’s other fixed obligations like rentals for residential and business premise, EMIs on existing loans as that will determine their ability to take on an additional long-term loan.
There are other factors too that play a role, such as the age of the applicant, the younger the applicant, the more likely is a 15-20 term loan to be sanctioned. Also, sometimes it helps if a co-applicant, like a spouse or close family member, is added to the loan application.
There could be situations where self-employed individuals in the non-formal sector are not able to provide all the formal income proof. However, even in this case they could qualify for a loan provided they are able to show an adequate business turnover and meet all the other criterion, especially if they have a good history of loan repayment. Though, of course, they may be looking at slightly higher interest rates than a salaried person.
Ideally, self-employed individuals should look at funding their home purchase with a bigger down payment from their savings and keep the home loan amount down to the minimum requirement.