Self-Employed Professional? Here's How To Get Home Loan Easily
Home loan can be a tedious and tiresome task for self-employed or business owner as the method to calculate loan eligibility in such cases by banks and housing finance companies, is different than salaried borrowers. One of the primary reason behind this is the uncertainty in income flow and job continuity.
Here is a sneak peek into how banks process home loans for self-employed professionals-
There are two categories in self-employed individuals- self-employed professionals and self-employed non-professionals or businessmen. There is a host of documents you have to be ready with before you apply for the loan. These include-
For self employed professionals-
- Identity proof documents
- Tax returns, audited profit and loss statement with the balance sheet of past two years,
- A brief business profile of on your company's firm's letter head
- Savings and current bank account statements of past six months
- A copy of the partnership deed, the memorandum of association
- Educational and professional qualification certificates.
- You may have to submit a salary certificates in case you are also employed with another organisation. Doctors, for example, can fall in this category.
- The shop establishment licence will be required in case of professionals working in stores.
For self-employed non-professionals or businessmen
- Copy of your IT returns for the previous three years along with income computation attested by a CA
- Copy of the Balance Sheet and Profit and Loss Account of your business for the previous three years attested by a CA
- A brief business profile on the letterhead of your firm or business
- Bank statement of the last 6 months for Savings Account, Current Account, O/D Account
- Copy of VAT Registration / Shop & Establishment License or any other mandatory license or registration
The age norm
To avail of loans, an SEP must be between 22- 65 years of age. Some banks lend to people of up to 70 years of age if the proper succession plan and the income proof are available.
The income norm
An SEP must have spent at least three years in his business to avail of a home loan and should be able to show a minimum cash profit of Rs 1.20 lakh in the past two-year period. A few banks also consider the number of years spent at a location/place of business as a criterion.
The calculating method
For SEPs, banks use the gross receipts method to calculate eligibility. Every bank has the fixed multiplier (ranging from 2.5- 3.5) for the average gross receipts of SEPs. This fixed multiplier is higher for, say, a qualified doctor than someone who is an accountant or an architect. The equal monthly instalments (EMIs) for all the existing loans are deducted and a fraction of depreciation is included in your total income. Some banks switch to the net profit method if the gross receipt method does not seem to fit according to professional receipts.
Your additional income can be included to increase your loan eligibility.
Lenders conduct visits to the property and the factory premises to understand your business model and turnover. Your business must show growth in the cash profit, turnover and the tangible net worth in the past few years when you apply for a loan.
While the longest loan tenure for SEPs is 20 years, many banks restrict it to 15.
The LTV & Foir
Typically, banks keep the maximum fixed-obligation-to-income ratio (Foir) for SEPs at 70 per cent. Any relaxation in these norms is totally the lenders prerogative. The loan-to-value norms, on the other hand, are subject to the market value of the property. The LTV is generally 75 per cent for loans above Rs 75 lakh, 80 per cent if it ranges between Rs 20 lakh and Rs 75 lakh, and 90 per cent for loans below Rs 20 lakh.
Your banking habits
While maintaining a clean bank statement is crucial, any cheque bounces may also act negatively for you. The regular income credits must be visible in the bank statement every month.