Self employed, professionals and negative profiles
It is a known fact that banks are eager to offer home loans and loans of every other kind to salaried individuals. But what if you are a business owner or an independent doctor or lawyer?
What are the chances of home loan approval for a self employed or professional individual in India? Join us for a 4-part series on this.
When you apply for a home loan, there are two important categories the bank puts you in:
Why the classification?
When it comes to a home loan, which category you fall under will decide a lot of things for you. For example:
Interest applicable on your home loan
Acceptable ratio of home loan value to income
Minimum experience required
Minimum income required etc
At the end of the day, almost everyone gets a loan. But you will need to know which category you have to apply under.
Your category depends on what your primary source of income is. If your primary income comes from an employer then you are clearly a ‘salaried’ individual. You may be earning this salary in cash or in your bank account. If salary forms the larger part of your income and it is a regular salary income, then you will fall under ‘salaried’ category, regardless of other income sources.
Banks will consider you ‘self employed’ if you run your own business. The size of the business does not matter here. You could have a small shop or a world class manufacturing unit. Sole proprietorship and partnerships are considered self employed.
Freelance writers, independent consultants and Independent contractors are also considered self employed for this purpose.
When classifying customers, banks go one step further and segregate non salaried class into self employed and professionals. Professionals are those individuals who are qualified for a professional service and run their own show. The most obvious examples of professional are Doctors, lawyers, Chartered accountants Architects etc. They are self employed, but are called professionals for the purpose of home loan.
What are a bank’s concerns?
Banks are always eager to lend to customers who are dependable. Why do you think they want to know if you are self employed or salaried?
Source of income
The very first thing that sets apart a salaried individual from a self employed individual is their source of income. A salaried individual gets regular income. His salary is credited into his account at the end of every month. Even those who get their salary in cash can be reasonably sure that they will get paid every month. A salaried individual will also get a fixed amount of income every month. Over and above this fixed component, he may earn a bonus or variable pay.
On the other hand, if you are a self employed individual, your income comes from profits from running of the business. Now whether you make profit or not depends on a lot of things like – economic environment, nature of your business, seasonality of your business, risk involved, experience etc.
So when you apply for a home loan as a self employed individual, your bank will ask for proof of income for the past 2-3 years. The bank will verify this proof against your bank account and your income tax returns. If you run a business where income comes in cash, you would not have such proofs of your income. In this case, the bank will send someone over to your shop to verify how much income you generate over a period of time.
If you are a professional, then you may be earning income in cash as well as through banking channels. The bank will send an evaluator to your office or place of business in this case too. This evaluator will himself observe and make a report of the income you generate.
In the end, the bank will want to find out through its own investigation – how much income you earn and how stable it is.
Supporting income sources
Banks always want to know that you can manage your home loan comfortably. Income from business is not always steady. So banks look for additional sources of income. These additional incomes like rental, dividends, interest, agricultural income etc can add on to your income from business and help you comfortably pay off your home loan.
Your eligibility is also dependent on your income. So it helps if you have regular income from different sources to add on to your income from business.
Keep in mind that these additional sources of income should be regular and not one time. The income should also be legal and not from speculative trades.
Quality of property
You might wonder why a bank cares about the property that you buy.
When you buy a property on home loan, you have to mortgage it to the bank against the loan. The bank holds all original documents until you fully repay the loan. This property acts as a guarantee that you will repay your loan, failing which, the bank can sell the property off and recover the amount.
Now usually banks don’t like to take this route. But your bank will still want to know if your property is good, because they want to know if you can sell it off and pay off the loan if it comes down to it.
When you apply for a home loan, not only will your bank check if you are reliable, it will also check if your builder is reliable. Now, why would a bank want to know about your builder?
The bank does not exactly want to know about the builder. But it does want to make sure you are taking a home loan for a reliable property. The bank wants to make sure your builder has taken all approvals as required by the state and local governments. The bank also want to know if your property is on a freehold land, if the builder has proof of ownership and clear title deeds.
If your property is built on legal land, if the title deeds are clear, if the property does not violate any laws, when the time comes, you will find it that much easier to sell this property off. It is also likely that you won’t get embroiled in a legal battle over the property.
These days’ banks offer home loans to almost everyone. Whether you earn less or more, whether you earn in cash or through bank or whether you live in a big city or a town.
However, banks always prefer to lend home loan to customers who are most likely to pay back regularly and in full. Sometimes despite all stages of evaluation, some customers have either defaulted on their loans or refused to pay back or refused to adhere to laws with respect to the loan contract. This could be because of the nature of their personality, job or income.
In some cases, the customer may be reliable, but it may be impossible to assess the amount and stability of their income. So it would be difficult to judge how much to lend.
Obviously, banks are wary of getting into such situations and lose lakhs of their money. So, over time, every bank has created a set of profiles that they avoid lending to. This list differs from bank to bank, but there are some common profiles almost no bank looks forward to lending. Here are some of the usual suspects:
Politicians or people affiliated to politics
Multi level marketing professionals
Lottery agency owners
Junior police personnel
Illegal or immoral activities
Business of arms and ammunitions
Cyber cafes etc
It is important to know that banks want to lend home loans to customers. This goes for self employed individuals too. So if you are self employed, our interest rate may be a tad bit higher than a salaried individual, but you will still be eligible for a home loan.
As long as you have maintained a good credit history, a stable income and documents to back your case banks will be happy to offer you a home loan. Nothing stands in the way of your dream home!
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