Loan Basics. Home loans for the self-employed

The number of Indians turning entrepreneurs is on the rise. But when it comes to getting loans from financial institutions, the self-employed do not have it easy. In most cases, these loans go through greater scrutiny before being granted and may have more terms and conditions attached. Here we take a look at how a home loan for the self-employed person differs from that for a salaried individual.

If you are self-employed, lenders need to identify whether you are a professional or a non-professional. The reason is that banks and finance institutions change some of the loan terms and conditions depending on the category to which you belong.

Satish Kotian, Chief Operating Officer, Aspire Home Finance Corporation, (A Motilal Oswal Group Company), says, “Chartered accountants, architects, lawyers, etc come under professionals and retailers, small scale businessmen, etc come under the non-professional categories.” HDFC seems to be among the few to have given this clarification explicitly on their website.

These institutions also require a minimum number of years you must have been self-employed before you borrow. Canara Bank, for example, will give you a home loan only if you have been self-employed for a minimum of three years.

Age restrictions also exist. If you are taking a loan from PNB Housing Finance, you should not be more than 65 years of age at the time of loan maturity. For the salaried class, this age cap is 70 years.

On tenor, the salaried individual has an option to choose tenors between 20 and 30 years. But for the self-employed, the longer loan tenor of 30 years may not be available with some institutions. LIC Housing Finance caps the loan tenor to a maximum of 20 years for instance.

Interest rate is one of the major deciding factors while taking a home loan. Some institutions such as State Bank of India and HDFC keep the interest rate the same across categories, be it a salaried or a self-employed individual. But banks like ICICI Bank, and Axis Bank charge a higher rate from the self-employed.

In Axis Bank, the interest rate for a salaried individual is 9.60 and 9.65 per cent for loan up to ₹28 lakh and above ₹28 lakh respectively. The rates are at a higher 10.45 and 10.50 for the same loan amounts, for self-employed people. The self-employed are charged higher processing fee as well. Satish says, “There is a difference in rates and charges in some cases depending on the business stability and business transactions as per the verified documents.”

The documentation can be onerous too. Apart from address and identity proof, the self-employed have to produce more documents to get the loan processed and sanctioned.

They include copies of income tax returns of the last three years — both for the individual and the business, profit and loss statement and balance sheet for the same three-year period, education qualification certificates, proof of business, 6-12 months bank statement, etc.

It is for this reason that a higher processing fee is charged for the self-employed as there are more documents to be verified. Rishi Mehra, co-founder, Deal4loans.com, says, “Because the documentation is more the self-employed should be aware of all the required documents and keep it ready well in advance before applying in order to avoid a rejection.”

Experts say that the income tax return document is the key for a self-employed person who wants to get a home loan. Returns should be filed regularly every financial year.

According to them, public sector banks (PSBs) have more accommodative schemes than their private counterparts, making the former more suitable for the self-employed.

“Small and medium enterprises across major metro cities hold an account with nationalised banks and so these entrepreneurs may prefer to approach the bank with which they have a longer relationship in order to get a loan easily,” says Rishi.

On the tax part though, there is no difference between benefits for a self-employed and a salaried individual.

Neha Malhotra, Executive Director, Nangia & Co, says, “Both enjoy the same tax exemption of ₹1.5 lakh on the principal component under Section 80C and ₹2 lakh on the interest component under Section 24, for self-occupied property.”

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