Home loan

Home Loan Advice for Self Employed and Freelancers – Forbes Advisor INDIA

With the emergence of the booming gig economy thanks to the thriving start-up culture, freelancing has become a serious career choice lately, especially for people who don’t want to be locked into a job. typical corporate nine to five. 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 choose this option.

Whatever the reason, he still has more than his fair share of financial matters to worry about. The fluctuating nature of self-employed income sources can be a bit frustrating when applying for a home loan. After all, the usual home loan processes are designed to serve the workforce that still has traditional office jobs.

The good news is that India’s freelance or freelance sector has seen steady growth over the past few years. According to a report by Payoneer on “Self-Employment in 2020”, India’s labor economy currently consists of around 15 million self-employed workers. As a result, this has led to a greater need for lenders to be flexible and change their policies according to the interests of freelancers and freelancers.

So, while it may be difficult to get a home loan, it is entirely possible. Here’s a guide on how to get your home loan if you’re self-employed.

Why do freelancers/freelancers 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 favor job stability. And as a freelancer, your income is based on a per-project basis, which makes it inconsistent and lumpy. Unfortunately, most lenders reject home loans for freelancers and entrepreneurs without a three-year income history and a large deposit. So if your income fluctuates from month to month, lenders may be hesitant to tell you.

So while your income can be assessed by different means, you may need to meet stricter lending criteria to be accepted for a home loan.

Are all lenders the same?

For lenders, it’s all about risk. So, even if they all have the same rules, the criteria may be different. Many lenders avoid lending to the self-employed due to repayment uncertainty. But not all lenders are the same, some might even accept your application.

These days, more and more Indians are working for themselves, freelancing in various fields or running small businesses. Some lenders have realized the opportunity and are working on the same. However, to make things work in your favor, it is important to check the eligibility criteria carefully before applying. So if you’re self-employed and thinking about 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: Put down a bigger down payment

According to lenders, the higher the amount you put down, the less likely you are to withdraw in times of financial hardship. To prove you’re less risky, one of the best things to do as a freelancer is to start saving for a deposit. For lenders, your application becomes smoother once they see you’ve saved a deposit for your home and show you’re serious about it. So, instead of depositing 20% ​​or less, try aiming for 40% and even more, so that your financial institution assumes 50-60% of the loan-to-value risk. This will help you have an easier time qualifying for a home loan since you are financing a smaller portion of the home. Plus, not only will it increase your odds, but it will also lower your monthly payments.

But since each lender has their own criteria, each has their own rules on how much security you’ll 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 do they expect.

Tip 2: Get your papers in order

Freelancing is very different from a full-time job, especially when it comes to managing 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 applying for a home loan, prepare at least two years of accounts that include your income from previous years, balance sheets, profit and loss statements, and other documents for verification of your income. The overview of your annual income can be favorable, as your income fluctuates from month to month.

Here are the documents you will need and which can be provided:

  • Income statements and balance sheets for the last two years
  • Income tax returns for the last two to three years
  • A letter from an accountant detailing your income
  • A copy of your identity book or copies of both sides of your identity card (passport, voter card or copy of Adhaar card)
  • Personal bank statements for the last six months
  • Professional bank statements for the last six months

Tip 3: Boost your credit profile

Not maintaining a good credit history can come to 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 cleaning up small errors 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 each time an inquiry is made on the credit report, your score takes a hit.

Having the highest possible score shows your ability to repay a loan, and not just as a freelancer. Each lender has different criteria on their credit scores, but almost all look for a score of at least 620. However, not all lenders are after credit score, few of them can offer a home loan at a lower credit rating but this comes at fairly high interest rates.

Jip 4: Freelance for at least three years before applying

When you are self-employed, you become your own business. And when no one controls your work and your income, you have to prove that you have a professional history to your credit. So, there are two ways to apply, one is when you have at least two to three years of experience or when interest rates are low and you cannot wait. The reason for employment history is that lenders see that you can maintain an income throughout the year and can afford the monthly EMIs. This is why it is suggested that you have two to three full years of self-employment before lenders will consider you.

However, despite the challenges, you shouldn’t feel put off. There are many things you can do to put yourself in a position to buy a home.

Tip 5: Reduce your debt to income ratio

Your lender will not only look at your credit score, but will also check your repayment history and other dues and loans. Additionally, your debt-to-equity ratio determines the maximum home loan you can borrow. To make sure you don’t overwork yourself, the DTI ratio takes into account all your remaining debts (eg student loan, car loan, other debts, etc.). Calculating your DTI ratio is simple, divide your monthly debt payments by your monthly income. In accordance with the lenders’ policies, all credit expenses must not exceed 60% of the monthly salary. These conditions are even stricter when it comes to self-employed income.

Calculation of the DTI for an employee

Average income – INR 1 lakh

Car loan payment – INR 10,000

Other debts – INR 5,000

Home Loan Repayment – 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%)

Calculating the DTI for a freelancer

Average income – INR 1 lakh

Car loan payment – INR 10,000

Other debts – INR 5,000

Home Loan Repayment – 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% (i.e. more than 43%)

The 30% payroll deduction is due to the fact that the bank considers only 70% of declared income as the basis for a loan offer. This is because the self-employed income variable and the 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: Find a guarantor

When a lender offers a loan to a borrower, they need some kind of security that could be recovered in time of default by the borrower. As a freelancer, your variable income seems like a risk to the lender. Therefore, to reduce the risk you pose, find someone who can back you up for endorsement. Your guarantor’s professional and financial background must be strong enough to meet the same criteria as the loan applicant. The guarantor can be your spouse, your brother or your relative. This will assure your lender that there is someone with a stable 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 for the loan in the event of default.

Conclusion

It is 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’re self-employed can be a serious financial commitment for yourself (even if you’re approved). Nevertheless, let this not be an obstacle to buying your own home.

First, make sure you sort out the relevant documents and keep your finances handy. Second, be firm in everything you do, as a freelancer you can run your business efficiently and be a taxpayer which will increase your chances of getting the best home loan. Third, establish your income profile in advance and take the time to improve your creditworthiness. Fourth, do your homework to find the best independent financial institution that will definitely improve your chances of getting a home loan. Because even if these establishments are not able to grant you the loan, they can help you improve your file.

In case you are turned down for a home loan, never take it personally and never give up. Getting pre-approved can help you 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.


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