Are You A Trader? Here's How You Can Get Home Loan Easily
Ratnakar Singh, 38, runs a shop in Delhi's Chawri Bazaar for the past 10 years. His is a successful business that earns him good profits. However, his journey to avail of a home loan was not smooth at all. Singh's case is not unique. Despite the current government's ongoing efforts to encourage entrepreneurs and start-up businesses, self-employed non-professionals (SENPs) often find it difficult to deal with the current financial system. Retailers and small-scale businessmen, most of whom lack professional degrees, have to go through a greater scrutiny before a loan is sanctioned to them.
Here are things to keep in mind if you are a self-employed non-professional looking for a home loan.
Unlike the salaried class, lenders would require more proofs to verify your income level if you are an SENP. These include your identity proof, tax return papers, audited profit & loss account and balance sheet for the past two years, a brief business profile of your company on its letter head, the savings and current account bank statements for the past six months, and the memorandum and article of association to find your share in your company. Your repayment track of running loans will also be verified and this will require you to maintain another pile of papers. Producing the shop establishment licence is mandatory for shopkeepers and traders.
The age factor
An SENP must be 22-65 years of age to be able to avail of home loans. Some banks lend to people up to 70 years old, if proper succession plan and income proof are available.
The income norm
To secure a home loan as an SENP, you must have spent at least three years in your business and should be able to show a minimum cash profit of Rs 1.20 lakh in the past two-year period. Some banks also consider the number of years spent at a place as a criterion before giving loans to SENPs.
The eligibility calculation
Banks use the net profit method for calculating your eligibility for the loan. Under this method, your net adjusted income is calculated by adding the depreciation, appropriations, interest paid on loans (other than the one on working capital) to the net profit of your company. The running obligations have to be deducted from the figure so obtained. Rent paid by the firm as shown in ITR is considered, as the case may be. However, the income from capital gains, speculative income or one-time income/arrears are not included in your eligible income.
The turnover computation
Your repaying capacity is also assessed on the basis of your business' turnover. Every bank considers a fixed percentage of net sales (that is, the turnover) or a fixed multiplier of your company's profit before depreciation, interest and tax (PBDIT), whichever is lower, for a certain level of turnover. It is important that 50 per cent of this turnover is reflected in your bank statement. The eligibility calculation also depends on the nature of your business.
The highest loan tenure for you as an SENP is 20 years; many banks restrict this to 15 years.
The Foir & LTV
Banks keep the maximum fixed-obligation-to-income ratio (Foir) for SENPs at 70 per cent. Any relaxation in these norms is totally the lender's prerogative. The loan-to-value (LTV) ratio for you as an SENP may vary between 75 per cent and 80 per cent.
Your banking habits
If you are an SENP, it is advisable that you apply for a home loan from the bank where you maintain your current accounts. This gives the bank a clear picture about your cash flows, and your chances of securing the loan are higher. Any cheque bounces may impact your credibility negatively.
The business profile
It is crucial for the lender to understand your business profile because your business' credibility is as important as your personal credibility. The lender needs to understand the business product, the life of the product, the risk involved, the business practices, etc, to ascertain your business' strength in the market.