With the emergence of the booming gig economy thanks to the flourishing start-up culture, freelance work has recently become a serious career choice, especially for people who don’t want to be locked into a typical job. from nine to five in business. While some have carefully self-assessed their skills and lifestyle to become independent in their careers, there are also others who have been forced by Covid-19 to adopt this option.
Whatever the reason, he still has more than his fair share of financial matters to worry about. The fluctuating nature of income sources for self-employed workers can seem a bit frustrating when applying for a home loan. After all, the usual home loan processes are designed to serve the workforce who still have traditional office jobs.
The good news is that the self-employed industry in India has grown steadily over the past few years. According to a Payoneer report on “The Self-Employed in 2020”, the labor economy in India currently consists of around 15 million self-employed. As a result, there is a greater need for lenders to be flexible and change their policies to suit the interests of freelancers and the self-employed.
So while it can be difficult to get a home loan, it is very possible. Here is a guide on how to get your home loan if you are self employed.
Why do self-employed / self-employed people struggle to get a home loan approved?
For the self-employed, it has always been difficult to obtain a mortgage. Because even if your average income may be satisfactory, lenders prefer job stability. And as a freelancer, your income is based on a project by project basis, which makes it inconsistent and spotty. Unfortunately, most lenders reject home loans for freelancers and entrepreneurs with no three-year income history and no large deposit. So if your income fluctuates from month to month, lenders may be hesitant to tell you.
So, although your income may be assessed in different ways, you may need to meet more stringent loan criteria to be accepted for a home loan.
Are all lenders the same?
For lenders, it all comes down to risk. So even though they all have the same rules, the criteria may be different. Many lenders shy away from self-employed loans due to the uncertainty of repayment. But not all lenders are the same, some may even accept your request.
Nowadays, more and more Indians are working for themselves, working freelance in various fields or running small businesses. Some lenders have taken the opportunity and are working on the same. However, in order for things to work in your favor, it is important to carefully check the eligibility criteria before applying. So, if you are self-employed and are considering applying for a home loan, here’s what you need to do.
Here are six tips for getting a home loan as an independent contractor.
Tip 1: Make a larger deposit
According to lenders, the larger your down payment, the less likely you are to withdraw in times of financial difficulty. To prove that you are less risky, one of the best solutions as a freelance writer is to start saving for a deposit. For lenders, your application becomes smoother once they see you’ve saved a down payment for your home and show you’re serious about it. So instead of a deposit of 20% or less, try to aim for 40% or more, so that your financial institution takes 50-60% of the loan / value risk. This will help you qualify for a home loan more easily since you are financing a smaller portion of the house. Moreover, not only does it increase your chances, but it will also lower your monthly payments.
But since each lender has their criteria, each has their own rules for how much deposit you will need to get a home loan. Shop around to find the right kind of well known lenders to offer self employed home loans and what kind of deposit they expect.
Tip 2: Put your papers in order
Self-employment is very different from a full-time job, especially when it comes to handling documentation. In a traditional office job, your company takes care of your payslips, tax returns etc., uploading everything to the portal. However, when you are self-employed, you are responsible for ensuring that your accounts are up to date and prepared by a professional accountant. Before you apply for a home loan, be prepared with at least two years of accounts that include your income from previous years, balance sheets, profit and loss statements, and other income verification documents. Your annual income snapshot can be favorable because your income fluctuates from month to month.
Here are the documents you will need which can be provided
- Income statements and balance sheets for the last two years
- Tax returns for the last two or three years
- A letter from an accountant detailing your income
- A copy of your identity book or double-sided copies of your identity card (passport, voter card or copy of Adhaar card)
- Personal bank statements for the past six months
- Commercial bank statements for the past six months
Tip 3: Boost Your Credit Profile
Not having a good credit history can haunt you at a later date. Lenders assess your credit profile and check your score while making a loan decision. It basically serves as a simple assessment tool to find out your eligibility for a home loan. Improve your credit score by simply eliminating small mistakes in your credit history, such as an incorrect address, name or phone number. The next thing to keep in mind is not to open new lines of credit. Limit the forms of credit you acquire because every time a credit report investigation is done your score takes a hit.
Having the best possible score shows your ability to repay a loan and not just as a freelancer. Each lender has different criteria for their credit score, but almost all look for a score of at least 620. However, not all lenders go after the credit score, few of them can offer a home loan at a rate. lower credit rating, but this comes down to fairly high interest rates.
Tip 4: Freelance for at least 3 years before applying
When you are self-employed, you become your own business. And when no one is in control of your work and income, you have to prove that you have a work history under your belt. So there are two ways to apply, one is when you have at least two to three years of experience or when the interest rates are low and you can’t wait. The reason for the employment history is that lenders see that you can maintain income throughout the year and that you can afford the monthly IMEs. That is why it is suggested that you have two to three full years of self-employment before lenders consider you.
However, despite the challenges, you shouldn’t feel put off. There are a lot of things you can do to be able to buy a home.
Tip 5: Lower Your Debt-to-Income Ratio
Your lender will not only look at your credit score, but also check your repayment history and your other contributions and loans. Plus, your debt-to-income ratio determines the maximum home loan you can borrow. To make sure you don’t go overboard, the DTI ratio takes into account all of your remaining debt (e.g. student loan, car loan, other debt, etc.). Calculating your DTI ratio is simple, divide your monthly debt payments by your monthly income. According to the policies of the lenders, all credit expenses should not exceed 60% of the monthly salary. These conditions are even stricter when it comes to independent income.
Calculation of the DTI for an employee
Average income – INR 1 lakh
Car loan payment – 10,000 INR
Other debts – 5,000 INR
Home loan payment – INR 20,000
Total monthly debt payments – (INR 10,000 + INR 5,000 + INR 20,000) = INR 35,000
DTI ratio – 35% (which is less than 43%)
Calculation of DTI for a freelance
Average income – INR 1 lakh
Car loan payment – 10,000 INR
Other debts – 5,000 INR
Home loan payment – INR 20,000
Total monthly debt payments – (INR 10,000 + INR 5,000 + INR 20,000) = INR 35,000
DTI – 35,000 / 10,000 – 30% payroll deduction
DTI ratio – 50% (which is more than 43%)
The 30% salary deduction is due to the fact that the bank only considers 70% of the declared income as the basis for a loan offer. This is because the self-employed person’s income variable and banks keep a 30% buffer with them. Therefore, freelancers should keep the debt to income ratio as low as possible. A lender can’t lend you if they see you carrying other debt each month in addition to the home loan.
Tip 6: Get a guarantor
When a lender offers a loan to a borrower, he needs some sort of collateral that would be able to recover in the event of default on the borrower’s side. As a self-employed person, your variable income seems a risk to the lender. Therefore, to reduce the risk you pose, find someone who can support you for approval. The professional and financial history of your guarantor should be strong enough to meet the same criteria as the loan applicant. The guarantor can be your spouse, your brother or your relative. Doing this will assure your lender that there is someone with a regular income supporting you.
However, this person is only a guarantor in times of financial difficulty, so it is important to be upfront about your ability to repay the loan to avoid giving them full responsibility in the event of default.
Final result
It’s important to know that being self-employed is rewarding in its own way, but comes at a price. Taking out a home loan when you are self-employed can be a serious financial commitment on your own (even if you are approved). However, let this not be a barrier to buying your own home.
First of all, make sure you sort out the relevant documents and keep your finances handy. Second, be firm in whatever you do, as a self-employed person you can run your business effectively and be a taxpayer which will increase your chances of getting the best home loan. Third, build your income profile ahead of time and take the time to improve your creditworthiness. Fourth, do your homework to find the best self-employed financial institution that will definitely improve your chances of getting a home loan. Because even if these institutions are not able to grant you the loan, they can help you improve your file.
In the event that you are refused a home loan, never take it personally and never give up. Getting pre-approved can help improve your chances and know your eligibility. On the bright side, many self-employed people have gotten approvals for home loans in the past, so it’s certainly not impossible. Always keep in mind to repay the loan responsibly.