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What is a Mortgage ?

A Mortgage loan, also known as a home loan, is a loan that is taken out to purchase a property. The property acts as collateral for the loan, and the lender holds the title to the property until the loan is fully repaid.

When taking out a home loan in India, the borrower agrees to make regular payments to the lender, which typically include both principal and interest. The interest rate and terms of the home loan can vary depending on several factors, such as the borrower’s credit score, the amount of the loan, and the loan term.

Typically, home loans in India have terms ranging from 15 to 30 years. While a longer loan term may result in lower monthly payments, it also means that the borrower will pay more in interest over the life of the loan.

Will My Business Loan Affect Getting a Mortgage or Home loan?

Imagine, You are a driven entrepreneur with a thriving small business, and now you’re ready to take it to the next level with the right financing. At the same time, your family is growing and you need a larger home. In such a scenario, you might be considering applying for both a home loan and a business loan at the same time.

Although it may seem like a lot to handle, with careful time management and discipline, it’s possible to manage both processes. However, when you apply for a loan, the lender may perform a hard inquiry on your credit report, which can temporarily lower your credit score. But don’t worry, securing a business loan shouldn’t prevent you from qualifying for a home loan in India.
We’ll take you through the steps of applying for a home loan after securing a business loan, and what you can expect if you apply for both loans at the same time. Whether you’re a first-time home buyer or looking to upgrade, we’ve got you covered.

How Business Loans Impact Your Chances of Getting a home loan?

When it comes to getting a home loan, it’s important to understand how different financial factors can affect your approval. One such factor is having a business loan. While it’s a common belief that having a business loan will negatively impact your home application, this is not always the case. In fact, if your business loan is in the name of a limited liability company or corporation, it shouldn’t affect your home loan approval at all.

Income from business

When you’re applying for a home loan to buy a house, the lender wants to make sure that you have enough money coming in to pay back the loan. If your business is your main source of income, the lender will be particularly interested in making sure that your business is bringing in enough money. To be a good candidate for a home loan, lenders like to see that you have a stable, steady income that can be easily verified.

Debt to Income Ratio

The lender will also look at your debt-to-income ratio, which is the amount of debt you have compared to how much money you make. A lower debt-to-income ratio is better, and having a business loan that is under your name will make your debt-to-income ratio higher. That’s because the loan will count as debt that you owe, which will increase the amount of debt you have compared to your income.

Type of Business Matters

When it comes to applying for a home loan, the type of business you run can make a difference. If you’re a sole proprietor, your business is considered part of your personal finances and your credit score can be impacted. This might cause your lender to take a closer look when they’re evaluating your home loan application.

On the other hand, if you have a business structured as a Limited Liability Partnership (LLP), or a Private Limited Company, the business is seen as separate from your personal finances. In these cases, any business loans you take out won’t typically affect your home loan application.

How do different business structures affect your credit score?

How does having a Limited Liability Partnership (LLP) affect your credit score?

An LLP is a separate business entity from its owners and partners. As a result, the credit scores of the company’s owners or partners are usually not impacted by any financial dealings related to the business. If an LLP takes out a business loan in its name and fails to repay the loan or goes bankrupt, these negative events will not appear on the credit scores of the owners or partners.

However, if an owner of an LLP personally guarantees a loan taken out by the LLP, the loan will appear on the owner’s credit report. If the LLP successfully pays off the loan, it could have a positive impact on the owner’s credit history. But, if the LLP defaults on the loan, it could have a negative impact on the owner’s credit history.

Financial actions taken by a Private Limited Company or a One Person Company (OPC) should not affect the credit reports of any owners or officers.

How does having a Sole Proprietorship affect your credit score?

Many small businesses in India are structured as Sole Proprietorships. This means that there is only one owner who manages the business and is responsible for all debts and liabilities. The owner’s personal bank account is used for the business transactions and they are also required to pay personal income tax on the business income.

Since there is no separation between the personal and business finances in a Sole Proprietorship, your credit score can be significantly impacted by your business dealings. Lenders will take into account both your personal and business finances while evaluating your creditworthiness.

If you have taken any business loans or have a business credit card in your name, you are personally responsible for repaying them. Missed payments or outstanding debts will appear on your credit report, affecting your credit score. Similarly, high balances on your personal credit card used for business expenses can also impact your credit score.

It is important to note that this applies to unincorporated partnerships as well, where partners are personally responsible for the debts of the business, and those debts will appear on each partner’s credit report.

What about credit enquiries on your Credit Score?

In India, credit enquiries are categorised into two types – hard enquiries and soft enquiries. When a financial institution or creditor assesses your credit report to determine your credit history and creditworthiness, it is recorded as a hard inquiry. These hard enquiries stay on your credit report for a period of 2 years.

What is the impact of credit enquiries on your credit score?

Applying for a business loan or a home loan in your personal name can result in multiple hard enquiries, which can cumulatively have a negative effect on your credit score. This also sends a signal to the lenders that you are trying to take on more debt, which may lead to them offering less favourable loan terms, such as a higher interest rate or larger down payment. It is essential to keep an eye on the number of hard enquiries you have, as it can have a significant impact on your creditworthiness.

Note: If you are seeking multiple types of loans (like a business loan and a home loan), each enquiry will be counted separately and may have a negative impact on your credit score.A tip to keep in mind is that there is a limited time frame (usually around 1 to 2 weeks) where you can compare different loan options before all the hard enquiries are recorded. For more information contact REFER LOAN

Essential Considerations for Securing a Home Loan along with a Business Loan in India

If you are considering obtaining a home loan in addition to a business loan or applying for both at the same time, here are some important tips to keep in mind:

  • Minimise Hard Credit Enquiries: Every hard credit enquiry has the potential to negatively impact your credit score. To minimise this effect, choose lenders carefully and limit the number of applications you submit. If possible, try to submit all your loan applications at once, so that the credit enquiries occur within a 2-week window and are counted as a single enquiry.
  • Keep Credit Card Debt Low, But Keep Accounts Open: Paying down your credit card debt can increase your chances of obtaining credit, but after you pay off the debt, do not close the accounts. An unused credit card account helps create a positive debt-to-income (DTI) ratio and shows a longer credit history.
  • Stay Current on Payments: While paying down your credit card debt, make sure to keep up with all other payments. Late payments can harm your credit report and a record of timely payments is especially important when applying for a home or business loan.
  • Consider Obtaining the Business Loan Later: If your personal and business finances are not legally separated, obtaining a business loan can affect your credit score. It may be wise to wait to get a business loan until after you have closed on your home loan.
  • Build Savings: Having a larger down payment saved up will reduce the amount you need to borrow, making lender approval more likely.
  • Restructure Your Business: If you own a sole proprietorship or partnership, consider restructuring it into an LLP, Sole Proprietorship, or Pvt Limited to separate your credit history and credit score from your business. This can help protect your personal credit in case of any business-related financial issues.

Can a business take out a home loan in India?

While a business can apply for a mortgage/home loan for a residential or commercial property that generates income, the rules and regulations are different for the two types of properties. For instance, a business can take out a mortgage on an apartment building, but only if the other units generate rental income. The owner of the business can also live in one of the apartments, as long as the property generates income for the business.

However, when it comes to purchasing a residential property that is not used as the primary location of the business, it is generally not possible for a business to obtain a loan. In cases where the residence also serves as the primary business location, there are specific regulations that must be followed in order to obtain a home loan. Thus, it is important to be aware of the laws and regulations before applying for a mortgage or home loan  for a business in India.

What are the financing options for small businesses instead of  business loan?

If you are a small business owner and in need of financial support, there are several alternatives to traditional business loans that you can consider.

Working Capital Loans: These loans are designed to cover the daily expenses and operational costs of your business. They can be especially helpful during periods of low cash flow or seasonal slowdowns. However, be aware that working capital loans require regular payments, so you must be confident that your business can keep up with them.

Business Overdraft: Another alternative financing option is a business overdraft. This type of credit offers high limits and lower interest rates compared to business credit cards. This makes it a favorable option for businesses that need extra funds to invest in growth opportunities or marketing initiatives. Acquiring a business overdraft can be challenging, and lenders may ask for collateral, so make sure to discuss the options available with your lender.

Exploring alternative financing options can help you find the best solution for your small business needs. It is important to compare the terms, rates, and requirements of each option before making a decision. 

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