There is a huge misconception amongst the people that the home loans are not for the self-employed people. The misconception arises because of the criterion of income stability, but if you see the recent data published by various institutes and media houses, the percentage of self-employed in home loans is on the rise. Moreover, the tenure of the loans is also same for salaried people as well as the self-employed ones. The key difference is only in the documentation for the loan and earnings and the credit scores decide the eligibility.
Eligibility for home loans – Salaries & Self-employed
While the main requirement to be eligible for the home loan for a salaried person is permanent employment with a reputed organization or in government offices. The same for a self-employed is that he or she can be in business who files income tax returns or a professional like Chartered Accountant, Doctors, Architects, and Engineers.
The age criterion for both self-employed and salaried people approaching for availing home loan is same. The age should be within 24 years to 60 years. The loan must be matured within the 60 years age of the person who has taken the loan.
So, if you see the eligibility criteria, there is no bias for the salaried people. The self-employed can also avail the home loans without any hassle if they are doing well in their own field.
Common requirements for both
The main factors which make one eligible for a home loan are the creditworthiness and income stability. Often the banks and the financial institute deny loan application if they see a huge variation in the income of the person. Now, this answers the question or the myth that why self-employed is not a good fit for the home loans. In most of the cases, the income structure is variable for a self-employed. When in one year, he or she might have earned huge profits the next year might be a down year. This gives a negative impression on the financial institutions as they also have to get back their money through EMIs or part payment. Now, if the income is not stable, the self-employed might not be able to pay the EMIs on time, and thus the financial institution has to suffer a loss. This is why they scrutinize the income stability part very strongly when assigning home loan for a self-employed.
The next is creditworthiness which is mostly assessed by the credit score. The credit agencies provide a credit score to the candidates who availed loan earlier or file income tax. The financial institutes also check the credit history of the customer before providing any funding. If the credit score is low, that is the customer has already missed EMIs in the earlier loans or has made late payments, and it becomes a negative aspect. But credit score can be improved within a period of time with planned efforts.
This is not biased because if you remember the great financial crisis, the whole world had to suffer for mortgages/home loans which created NPAs. The financial institution has to see whether the customer can repay the loan or not. If the customer is unable to repay the loan, then the mortgage/collateral given for availing the home loan will become a Non-performing asset for the financial institutions in most of the cases. If the financial institutions cannot sell the mortgage and recover the money, then the value of NPA will keep rising in the book. This will affect the business of the institute. Thus whether a person is self-employed or salaried, the banks always check their creditworthiness before passing the home loan application.
For the salaried, the documents which are required to avail home loan are –
- The salary slips of past three to six months.
- Past six month’s bank statement which includes the salary account.
- Income tax return form (latest).
- If you are in the job less than a year, then you need to produce the employment or the offer letter as well.
In the case of self-employed, the list of documents is really long –
- Income tax returns –
- It should include the current financial year’s income computation
- Tax payable
- Last three year’s income calculation
- Auditor certified company’s financials – Balance sheet and income and loss statements.
- The schedules and annexure are needed to be attached.
- Past six month’s bank statement – both current and savings account of the business and the proprietor/self-employed respectively.
- If there are any loan taken as an individual or for the business which is present in the books, documents, and details for the same has to be produced.
- Legal documents of registration under GST, trade license etc.
So, you can understand from the above, that home loans are for all whether salaried or self-employed. It just the documentation and verification process which are little stringent for the self-employed.