Loan Basics. Home loans made easy for self-employed

Until recently, entrepreneurs and self-employed found it easier to set up businesses than obtain home loans. Their success and sustainable vision did not necessarily guarantee housing loans because financial institutions often viewed them with scepticism and questioned their financial stability.

Though the self-employed account for a chunk of the housing demand in India, their access to institutional credit has been considerably lower than the actual house purchases. Consequently, many of them have been living out of rented homes or looking at other sources of funds like extracting money from the working capital of their business to buy a new house.

Change in perception

Leveraging on this opportunity, housing finance companies (HFCs) are now taking a more favourable view of the self-employed segment and have customised offerings that suit their profile and financial capacity.

Over the past, HFCs followed a rather restrictive policy while lending to the self-employed; the average sanctioned corpus was well below the salaried and other segments. But now, they are no longer seen as a high-risk category, but rather as high-potential customers who can contribute to the growth story.

There are three reasons why HFCs are perceiving the self-employed as a serious business strategy and a growth prospect — one, the self-employed are the new protagonists of the India growth story; two, there are financial institutions in the market that are not averse to giving home loans to the self-employed; and three, the purchasing power of a new breed of 21st century goal-oriented businessmen and women.

Repaying capacity

Now comes the critical part — loan processing for the self-employed.

Unlike the employed or salaried class, a self-employed cannot provide an employment letter or salary slip to be eligible for a home loan. For instance, HFCs would like to know if the self-employed has regular cash flow to pay the EMIs, since it indicates the borrower’s ability to service the loan on a monthly basis through its full tenure. But that would depend largely on how well the business is doing.

To establish the repaying capability of the applicant, HFCs ask for balance-sheets, profit-and-loss accounts, income-tax filings and other financial papers of the last few years.

Self-employed applicants stand a better chance of getting housing loans if they submit IT returns for at least two to three years, as this increases the eligibility for higher amounts. Financial institutions also consider income from non-core sources such as rentals from other property and income from investments, while analysing the applicant's risk profile.

The self-employed can also considerably increase their chances of getting a home loan if they are willing to pay a higher down-payment on their dream home, show substantial savings in their bank account and have a good credit score.

Once the HFC is convinced of the self-employed’s financial stability, the next step is property appraisal. The financial institution will appraise the chosen house and ensure that it has a clear and marketable title and is free of all encumbrances. Loan applications are liable to be rejected if the above criteria are not met.

Self-employed applicants also need to keep in mind that, in case of an existing loan, the HFC is likely to adjust the eligible loan amount against the prevailing EMI-to-income ratio that ranges between 50 per cent and 60 per cent. In case the EMI expense percentage is more than required, it is advisable to close any ongoing short-term loan, like a car or personal loan. This will enhance the loan sanction amount significantly.

One should not be let down if the HFC rejects the application. The applicant can always re-approach the financial institution after sometime or discuss the reasons of rejection with them. One of the reasons may be that the institution may evaluate the repaying capacity of the applicant negatively. They can also go to another HFC for the requirement that may be willing to execute the transaction.

Step-up facility

The good news for the self-employed is that, nowadays, HFCs are offering loans for as long as 30 years along with a step-up facility. In other words, this means that they can initially pay lower EMIs on their loans and gradually increase the instalments as and when their business income goes up.

This reduces the burden on the monthly expense, leaving them with more funds, which can be deployed towards making the business productive and profitable. Another important factor to consider is that HFCs offer commercial property loans, loans for purchase of office premises, etc. The self-employed can also take a top-up on the existing loan from their current financial institution.

The home loan market for the self-employed is robust and promising now. HFCs are sanctioning loans for buying an under-construction, ready-for-possession or resale house, renovating a home or even constructing on a plot of land, thereby fulfilling their goals of running a successful business and living in a dream home.

The writer is Executive Director and Business Head, PNB Housing Finance Limited

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