If you are self-employed or a self-employed professional and you are planning to take a home loan, these series of posts are ideal for you. We covered how banks identify self-employed home loan borrowers in Home loans for self employed – Part I
Today we look at the different aspects of income of a self employed home loan borrower.
Incomes of self employed
If you are self-employed, it is possible you have a business. The nature and size of your business will mean you are earning an income in cash or through banking channels. If you have a sole proprietorship or a partnership firm all your transactions would typically go through banking channels.
When you apply for a home loan whether you earn income in cash or through banks, you can still be eligible if you meet all the other criteria.
Self-employed & professionals with non-cash income
If you have your own business your income would be profit from your business operations. If you are a professional, you would earn by way of professional fees.
When you file your income tax returns, there are some expenses that you can write off against the income. In case of business these expenses would be vehicle, telephone, salary of employees, lease or rent paid for place of business etc.
In case of professional income too, you can write off many expenses like office rent, driver salary, equipment upkeep, purchase of new equipment etc.
Some banks consider gross monthly income and some consider net monthly income to calculate your home loan eligibility.
Income from different sources
When you work as a salaried employee, you generally know how much salary you would get each month. In some jobs you would also earn bonus or variable pay. This will be in addition to the salary.
But when you run your own practice or business, there is always a risk that the venture may not take off. Unlike a salaried employee, if your work does not take off well, you cannot quit and move to another job.
Therefore, it is always best if you make multiple sources of business. This is especially helpful when you want to apply for a home loan. A bank will look at your other sources of income and include it when your eligibility is calculated.
Some points to keep in mind are:
Interest from deposits, rent from other properties, royalties, dividends etc can be used as additional income for increasing eligibility
If you are earning rental income, then you should have a registered rental agreement. Your rental income should ideally come through banking channels.
Banks will consider up 50-100% of rental income and bonus as additional income. This could increase your eligibility for home loan
Banks are most concerned about how you will pay back the money you have borrowed from them. So one of the most important aspects they want to look into is your income statements for the past 2-3 years.
First the bank will see how much income you earn. Then the bank will look at how steady your income is. Now why is the bank concerned about a steady income?
When a salaried person earns income, there is some guarantee that he/she will get a fixed component every month. In some months there maybe a variable income, but a certain part of the salary is fixed for sure.
But this is not the case in a business or professional practice. For various reasons, there could be a period of lull. A phase lasting a month or so is not an issue. But banks will red flag your case if there are too many ups and downs in your income flow.
If you are careful, you can manage this issue even before it arises. Here are some things you can do to plan a steady source of income:
Plan place of business well. See if you can have more than one place of business or presence in more than one place.
Price your service or products so that they match the industry norm.
Project future growth prospects and expenses and factor those into your initial price. This way you won’t have to hike your fees or prices suddenly
Plan a gradual increase in price or fees. This way you can expect your consumers to accept the price hike more easily
Income documents expected from self employed & professionals
As you know, these days banks are offering special home loan products even if you don’t have all your income documents. However, the interest rate on such products is higher than others. So it is better if you do have all the documents in place when you apply for a home loan.
Here is a list of documents that a self-employed person needs to prepare when applying for a home loan
Proof of business
Municipal receipt of registration
Certificate of incorporate or MOA or MOU
Proof of income
6-9 months bank statements
Current account, Savings account bank statements
Income tax returns for past 3 years (ITR)
If you file under section 44 AD then ITR would not be required
Income and expense statement
Or Profit and loss statement
If income is high value, then audited P&L statement
Proof of obligations
Most banks look at only the large value loans against your name.
Sanction letters from banks for your existing loans
Bank statements that reflect the loan instalments
Do follow our posts as we extensively cover more topics on home loans for self employed and professionals in our future posts.
We would love to hear from you, do reach out for new loans, balance transfer, queries or just to share your experiences with us.
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