It is much easier for a salaried individual to apply for a home loan. Reason: It is easier to gauge their creditworthiness because of regular cash flows, expenses and savings. As a self-employed, however, there are many challenges a borrower faces when looking to buy their first home. It can be difficult to get a home loan for a self-employed person, as usually they do not have a regular flow of income and a good credit score.
The self-employed person generally includes professionals like lawyers, chartered accountants and doctors who have their own practice. It also comprises insurance agents, shop owners, freelancers and traders who run their own businesses.
Self-employed individuals are also often required to provide extensive paperwork in order to qualify for a home loan. Some of the documents include a signed lease agreement with a landlord which will show how much rent is paid per month, proof of income, which can be the most recent tax return, proof of assets, which can be bank statements or the title document for the car to put up as collateral, a credit report that is less than two years old and a copy of driver's licence or passport.
Many a times self-employed persons are also charged with higher interest rates than their salaried counterparts. But there are some steps that you can take to make the process easier and more likely for success.
“The first tip is to increase your down payment. If you have a larger down payment then it will make it easier for the lender to approve your application because they know they will be able to recoup their money if something goes wrong with your loan,” said Atul Monga, co-founder and CEO, BASIC Home Loan.
Moreover, you can improve your chances of getting a loan by improving your credit score. You should also show the ability to save money and have some money in the bank. And finally, you should be able to demonstrate that you have the income required to pay back the loan over time.
“If you have a guarantor, you will have much better chances of getting a home loan. The guarantor will be liable for any default on the loan and this means that the bank will be more confident in lending to you. The guarantor is not always a family member or friend, it can also be your employer. This is especially true for people who are self-employed and have no other way to get a mortgage,” Monga added.
One of the most important tips for self-employed individuals is to lower your debt to income ratio. This is because lenders will be more likely to approve your loan application if you have low debt and high income. “To lower your debt to income ratio, you may want to consider paying all the debts before availing of a home loan,” said Monga.
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