Non-salaried too can get hassle-free home loans
The Economic Times, January 20, 2010, Page 10
While banks may not chase self-employed pros with home loan packages, they too can get funds for house purchases with proper paper work, says Preeti Kulkarni
SALARIED individuals have banks chasing them all the time for home loans as this segment of borrowers is best placed to deal with equated monthly instalments. Lenders have no hesitation in ‘pre-approving’ those holding decent positions in large companies.
But generally speaking, for the self-employed, the sanction process is not as standardised and straightforward as it is for the salaried. Lenders will not extend a loan unless they are fully convinced that the borrower is in a position to meet his/her monthly obligations. Here are some measures that professionals, self-employed and businessmen could take to ensure that their home loan sanction goes through smoothly.
First, a disclaimer. Not all professionals and businessmen find it difficult to raise a home loan. Some may encounter a simpler process and speedy loan disbursal vis-à-vis their salaried counterparts.
“Typically a salaried borrower would look for a loan worth 80% of the home value while self-employed borrowers tend to seek a loan for 55-60% of the property value, which means that loan-to-value (LTV) ratio is better,” says Kamlesh Rao, executive V-P — personal finance & mortgage of Kotak Mahindra Bank. In some cases, this factor could work to self-employed individuals’ advantage.
DOCUMENTATION
In addition to documents for fulfilling the know-your-customer (KYC) norms, a common requirement in all home loans is the proof of income. While for employees, a salary statement and Form 16 document submitted to the I-T department are proof enough, the self-employed need to provide some alternative proof. “A self-employed person could be earning income from a number of sources — his business could be paying him a dividend, or it could pay him a salary, or he might even be receiving interest on the capital he has deployed. The one common document that will show the income from all sources is the computation of income statement submitted to the I-T department,” says an HDFC spokesperson. Banks, therefore, insist on this document along with I-T returns for the last three years. In addition, they will also ask for balance sheet and profit & loss statements duly certified by a chartered accountant. If the loan is sought before the returns are filed, you will be asked to furnish the current year’s provisional statements and advance tax challans if any.
THE PROCEDURE
The key to getting your loan sanctioned is convincing the banker about the robustness of your business and cash flow. Typically, banks insist on a personal discussion with the proprietors to get their insights on the business model, actual margins, business mix and so on. “The ability of the lending bank to be able to plot the actual cash flow versus what their financials reflect is critical. We also look at the net worth of the applicant,” adds Mr Rao.
While assessing the repayment capacity of loan-seekers, banks take into consideration the actual cash profits made by the business, as this will be used for servicing the loan. Other factors that are considered, include properties owned by the applicants, their track record with their personal banker and so on — their repayment record as far as overdraft and working capital is concerned also counts.
Unlike salaried home loan-seekers, whose EMI servicing capacity is considered to be 50% of the net salary, there is no thumb rule in this case. Documentation alone is not adequate.
Therefore, the clarity of thoughts you display at the personal discussion to convince the bank about your credentials and the business prospects could go a long way in getting the loan approved. Furthermore, the line of business you operate in could also play a role. Those with businesses associated with sectors such as exports and textiles, which are cyclical in nature, could be at a disadvantage if the industry is passing through a rough phase.
SELF-EMPLOYED PROFESSIONALS
While the documentation for this category of home loan seekers would be similar, the process is less complex in comparison. This is because in case of most professionals, their earnings are reflected in their financial statements, thereby leaving little scope for any ambiguity. In contrast, many self-employed non-professionals could be conducting a major part of their dealings in cash.
Besides, banks draw comfort from the fact that in the event of any adverse impact on the business, the qualified professionals — like chartered accountants, doctors or engineers can always land a well-paying job.
HOME A ‘LOAN’
If you are a qualified professional
You stand better chance of getting a home loan if you are well-qualified and easily employable Lenders will look at who your clients are to ascertain steady income Your credit history and income tax records for the last three years are important Check if you need to submit the registration certificate for deduction of profession tax and the certificate of practice
If you own a proprietary concern
Ensure that you have your computation of income statement, along with tax returns Same goes for the registration certificate under Shop and Establishment Act and Factories Act Bank account statements, as well as profit & loss and balance sheet statements will be required too If you are engaged in an activity that is going through a downturn, lenders will be cautious Again, a good client list will impress the lender Give an accurate picture of your networth
If you are a part of a partnership
Have an up-to-date deed of partnership that provides for all situations Banks will ask for identity of partners I-T returns, again, forms a key document Like in case of proprietary firms, bank account, profit & loss and balance sheet statements will have to be submitted. Clear communication on your firm's goals, business mix, margins, etc, during the discussion with bank officials is critical.
The Economic Times, January 20, 2010, Page 10
While banks may not chase self-employed pros with home loan packages, they too can get funds for house purchases with proper paper work, says Preeti Kulkarni
SALARIED individuals have banks chasing them all the time for home loans as this segment of borrowers is best placed to deal with equated monthly instalments. Lenders have no hesitation in ‘pre-approving’ those holding decent positions in large companies.
But generally speaking, for the self-employed, the sanction process is not as standardised and straightforward as it is for the salaried. Lenders will not extend a loan unless they are fully convinced that the borrower is in a position to meet his/her monthly obligations. Here are some measures that professionals, self-employed and businessmen could take to ensure that their home loan sanction goes through smoothly.
First, a disclaimer. Not all professionals and businessmen find it difficult to raise a home loan. Some may encounter a simpler process and speedy loan disbursal vis-à-vis their salaried counterparts.
“Typically a salaried borrower would look for a loan worth 80% of the home value while self-employed borrowers tend to seek a loan for 55-60% of the property value, which means that loan-to-value (LTV) ratio is better,” says Kamlesh Rao, executive V-P — personal finance & mortgage of Kotak Mahindra Bank. In some cases, this factor could work to self-employed individuals’ advantage.
DOCUMENTATION
In addition to documents for fulfilling the know-your-customer (KYC) norms, a common requirement in all home loans is the proof of income. While for employees, a salary statement and Form 16 document submitted to the I-T department are proof enough, the self-employed need to provide some alternative proof. “A self-employed person could be earning income from a number of sources — his business could be paying him a dividend, or it could pay him a salary, or he might even be receiving interest on the capital he has deployed. The one common document that will show the income from all sources is the computation of income statement submitted to the I-T department,” says an HDFC spokesperson. Banks, therefore, insist on this document along with I-T returns for the last three years. In addition, they will also ask for balance sheet and profit & loss statements duly certified by a chartered accountant. If the loan is sought before the returns are filed, you will be asked to furnish the current year’s provisional statements and advance tax challans if any.
THE PROCEDURE
The key to getting your loan sanctioned is convincing the banker about the robustness of your business and cash flow. Typically, banks insist on a personal discussion with the proprietors to get their insights on the business model, actual margins, business mix and so on. “The ability of the lending bank to be able to plot the actual cash flow versus what their financials reflect is critical. We also look at the net worth of the applicant,” adds Mr Rao.
While assessing the repayment capacity of loan-seekers, banks take into consideration the actual cash profits made by the business, as this will be used for servicing the loan. Other factors that are considered, include properties owned by the applicants, their track record with their personal banker and so on — their repayment record as far as overdraft and working capital is concerned also counts.
Unlike salaried home loan-seekers, whose EMI servicing capacity is considered to be 50% of the net salary, there is no thumb rule in this case. Documentation alone is not adequate.
Therefore, the clarity of thoughts you display at the personal discussion to convince the bank about your credentials and the business prospects could go a long way in getting the loan approved. Furthermore, the line of business you operate in could also play a role. Those with businesses associated with sectors such as exports and textiles, which are cyclical in nature, could be at a disadvantage if the industry is passing through a rough phase.
SELF-EMPLOYED PROFESSIONALS
While the documentation for this category of home loan seekers would be similar, the process is less complex in comparison. This is because in case of most professionals, their earnings are reflected in their financial statements, thereby leaving little scope for any ambiguity. In contrast, many self-employed non-professionals could be conducting a major part of their dealings in cash.
Besides, banks draw comfort from the fact that in the event of any adverse impact on the business, the qualified professionals — like chartered accountants, doctors or engineers can always land a well-paying job.
HOME A ‘LOAN’
If you are a qualified professional
You stand better chance of getting a home loan if you are well-qualified and easily employable Lenders will look at who your clients are to ascertain steady income Your credit history and income tax records for the last three years are important Check if you need to submit the registration certificate for deduction of profession tax and the certificate of practice
If you own a proprietary concern
Ensure that you have your computation of income statement, along with tax returns Same goes for the registration certificate under Shop and Establishment Act and Factories Act Bank account statements, as well as profit & loss and balance sheet statements will be required too If you are engaged in an activity that is going through a downturn, lenders will be cautious Again, a good client list will impress the lender Give an accurate picture of your networth
If you are a part of a partnership
Have an up-to-date deed of partnership that provides for all situations Banks will ask for identity of partners I-T returns, again, forms a key document Like in case of proprietary firms, bank account, profit & loss and balance sheet statements will have to be submitted. Clear communication on your firm's goals, business mix, margins, etc, during the discussion with bank officials is critical.
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