April 2018

 

Any lender while granting any loan is interested in getting the money advanced back. While granting home loans, banks and housing finance companies evaluate your ability to repay the home loan on the basis of the income presently generated by you and the period for which the income will continue to flow. Generally banks grant you home loans equal to 5-6 times of your annual income and consider around 50-60% of the net monthly income available for servicing all of your loans. The number of times of your annual income you will get a home loan varies from a salaried person to a self employed due to various reasons.

For example, for salaried person the source of income is fixed and the salaried person does not have much scope to suppress his income and therefore the lender take the income shown in form no. 16 and ITR at its face value and accordingly the home loan eligibility is determined. Likewise as against a salaried person, a self employed person, whether a businessman or a professional, has scope to suppress his taxable income and in fact does it by various means.

Let us discuss the reasons why the self employed become eligible for higher home loan eligibility in detail.

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Receipt of income in cash

Unlike a salaried where the tax calculation and deduction is done by the employer, the professional or businessman generally has the flexibility to decide how much income to declare and how much tax to pay. This is because self employed people have the flexibility to enter into some cash transaction which is not recorded in the books of account. Everyone knows it so the home loan lenders take into account this fact and thus consider higher proportion of monthly income available for servicing the home loan and higher multiplier of annual income for determining the home loan eligibility.

Inflated expenses

In case of professionals like doctors, advocates or Chartered Accountants, even in cases where no cash transactions are done and the gross receipts are shown fully in the books of accounts, they still have scope to inflate the expenses claimed in the books of accounts. In most of the cases even personal expenses are also debited in the books of accounts and claimed as business expenses thus reducing their taxable income. Everyone including the income tax department is aware of it and that is the reason why part of the business expenses are disallowed on adhoc basis for income tax purposes by the assessing officer as and when the case is selected for detailed scrutiny. The banks and housing finance companies are also aware of this factual situation and factor into it while determining the home loan eligibility. So the home loan lenders consider higher multiple of your annual income for determining your home loan eligibility. Since the professionals would never show higher gross receipts than the actual, some of the private banks take into account your gross receipts instead of considering the net income offered by you for taxation, for the purpose of using multiplier for ascertaining the home loan eligibility in term of amount.

Depreciation

Businessman and professionals like doctors have to invest significant amounts in fixed assets like plant and machinery, building, furniture, computers etc on which the income tax laws allow you to claim depreciation on the basis of cost of a particular asset, against your income. Depreciation is just a book entry and does not involve any actual outflow of cash, the home loan lenders consider this fact and take the amount of depreciation debited in the books of accounts as available for servicing the loans and thus add it to your taxable income.

Longer earning life

While determining your home loan eligibility the banks and housing finance companies take into account your present age and number of years remaining of your earning phase. The longer the earning phase remaining to service the home loan, higher becomes your home loan eligibility. For salaried people generally 58 or 60 is taken as your retirement age and accordingly the home loan tenure is decided. Even the possibility of one working after retirement is not taken into account by the lenders. However for self employed the lenders presume that the borrower will be actively engaged in his business or profession till he turns 65 years of age. Since the self employed people enjoy longer repayment tenure as compared to a salaried person he becomes eligible for higher home loan amount.

So due to the reasons explained above the self employed person is in a better position to get a higher home loan eligibility even when the taxable income is the same as that of the salaried person.

Also read: How your Home Loan Eligibility is Decided?

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