Many of us may not be aware that a large share of housing demand gets generated by the self-employed category although credit penetration of this segment is lower than the actual house purchase ratio. But, over the past few years, it has become easier for them to obtain a home loan due to three primary reasons.
One, housing finance companies (HFCs) have opened their arms to them by offering tailored products that suit their profile. Two, the government’s flagship missions, Make in India, Startup India and Skill India, have brought businessmen into sharp focus; and three, there are more financial institutions in the market than before.
Considered as a high-risk category, self-employed on the contrary make a high potential prospect. Many housing finance companies have geared up their appraising capability to ensure that this target group does not go unattended. Customised products have been designed to offer home loans with a minimal disbursement time and competitive interest rates.
What HFCs do typically look at before approving a home loan for the self-employed?
Earnings: Since the loan eligibility is arrived primarily on the basis of your repayment capacity, credit history and security, hence it becomes important to know the income status of the applicant from both core and non-core sources. Financial institution will request for your balance sheet, profit and loss accounts, income tax filings and other financial documents for assessing the core income. Other income like rental from other property, income from investments etc. will form the non-core income and will also be considered. Financial institutions offer special income programme according to which the income of the self-employed customer is ascertained through his or her transactions, profit margins as well as through income tax returns. This helps in gauging the actual repaying capacity of the customer and makes him or her eligible for a higher loan amount.
IT Returns: This document is important when it comes to income verification. Financial institutions check last two to three years of tax returns to verify income and assess the consistency of profit over last two years.
Credit history: Financial institutions generally check the applicant’s credit score which reveals the applicant’s credit history. This helps them analyse the risk factors involved and understand the repayment capacity. Self-employed applicants with higher down payment on home buying, surplus savings and a good credit score can enjoy higher chances of a loan sanction.
Property appraisal: The financial institution, after assessing the applicant’s details, will further appraise the property in consideration to assess that it is free of any encumbrances and has a clear title history.
Any concerns arising during the property appraisal can lead to rejection of home loan even if the income appraisal is satisfactory.
Existing loan: In case the borrower has an existing loan, the eligibility home loan amount will be adjusted against the EMI-to-income ratio, which ranges between 50 and 60%.
Payment tenure: Nowadays, housing finance companies are offering loans for as much as 20 years. They can start paying low EMIs on their loans and as incomes go up, they can increase the EMIs. This balances their outflows and allows them to focus on developing their businesses without worrying about their finances. Many financial institutions and housing finance companies offer step up repayment facility with which the customer can start with a smaller EMI based on the income and gradually increase it as the income goes up.
The home loan market for self-employed is looking robust as housing finance companies are increasingly inclined to offer loans for a variety of needs, including purchasing an under-construction, ready possession or resale house, home extension, and even construction on a plot of land.
(The writer is Executive Director and Business Head at PNB Housing Finance)