pnb housing
October 4th, 2018

Making Home Loans Easier for Self Employed

Blog Seprator

Until recently, entrepreneurs and self-employed found it easier to set up their businesses than obtain home loans. Their success and sustainable vision did not necessarily guarantee housing loans because financial institutions often viewed them with skepticism and questioned their financial stability. Though the self-employed account for a large share 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 look away to other sources of funds like extracting money from working capital of their business to buy a new house.

Leveraging on this huge opportunity, HFCs are now taking a more favourable view of the self-employed segment and have customized offerings that suit their profile and financial capacity. In the past, HFCs followed a rather restrictive policy while lending to self-employed and the average sanctioned corpus was well below 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, self-employed are the new protagonists of the India growth story, largely because of the government’s flagship missions such as Make in India, Startup India and Skill India; two, there are more financial institutions in the market and these entities 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.

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 in order 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 borrower’s ability to service the loan on a monthly basis through its full tenure. But that would largely depend on how well the business is doing.

To establish the repaying capability of the applicant, HFCs will ask for balance sheets, profit and loss accounts, income tax filings and other financial papers of last few years. Self-employed applicants stand a better chance of getting housing loans if they submit consecutive IT returns for at least two-three years, as this increases eligibility for higher loan 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 criterias are not met.

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

The good news for the self-employed is that, nowadays, housing finance companies are offering loans for as long as 30 years along with a step-up facility. It 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 for making the business both productive and profitable instead.

Another important factor to consider is that HFCs offer many loans like commercial property loans, loans for purchase of office premises etc. So, if they look for a new office for business in future, they will not have to look anywhere else. They can also take top up on the existing loan from their current financial institution.

The way I see it, the home loan market for the self-employed has never looked more robust and promising than now. Housing finance companies are sanctioning loans for purchasing an under-construction, ready for possession or resale house, home extension and improvement, and even construction on a plot of land — fulfilling their goal of running a successful business and living in his or her dream home.

Author : Shaji Varghese
(The author is Executive Director and Business Head, PNB Housing Finance Limited)

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