How is the Turnover Evaluated for Self-Employed Home Loan Applicants?
We all know how hard it is for a self-employed individual to apply for a home loan and get it sanctioned. Lenders in the market are sceptical about these set of people as they don’t bring in a stable income. Still, if the applicant had filed the taxes, kept a decent credit score, maintained the books & documents in order and repaid existing loans on time, then he/she has very good chances of getting the loan sanctioned.
If the applicant meets all these requirements mentioned, they can determine the eligible loan amount with the gross annual turnover. The lenders in the industry have pre-determined margin levels for different loan applicants who fall under the self-employed category. This margin is utilized as the multiplier factor to the turnover, to find out the eligible level of income. I researched and learnt a lot about this turnover calculation when I wanted to buy one of the apartments for sale in Pallavaram Thoraipakkam Road with a housing loan. And here are some basic and essential excerpts from that learning:
Factors considered for eligibility calculation:
- Income from one or several businesses is considered while evaluating the eligibility criteria.
- All these businesses should be registered and at least the previous two years tax returns should be available during the time of application.
- Other sources of income like rental revenue and interests from savings can also be provided to better the chances of getting the loan sanctioned.
- Owning enterprises, holding other properties and being partners in other business ventures can also be added to enhance the eligibility.
- Non-cash involving expenses are considered while evaluating the net income derived from the businesses.
What exactly is the turnover method?
Turnover determines how fast a specific business sells and clears the inventory or how fast it receives income from accounts receivables.
The 3 main fiscal points of reference for determining the turnover are:
- Growth, that happens in the turnover process.
- Profit in cash derived after reducing all the expenses.
- Tangible net worth considered after deducting the liabilities from the total net worth along with other intangible assets.
Inspection process during the evaluation of the turnover:
- For the inspection of businesses, collaterals and other assets, the lenders make a compulsory visit to the properties and the factories.
- The lender has the right to visit these properties even after the housing loan is sanctioned or disbursed.
- Statement of the banks for at least a period of 1 year is necessary to determine the turnover.
- The recent banking habits are also evaluated by the lender.
- After all this, at least 50% of the net turnover should be shown in the statement of the bank.
Calculation of the turnover:
- Numerical calculation of the turnover is based on the net sales of the applicant and this factor varies from one lender to another.
- The lender arrives at a fixed percentile of the net sales of the business. Even this one varies from 15% to 25%.
- PBDIT is also calculated and it expands to “Profit Before Depreciation & Interests and Taxes.
- Now depending on the lender’s own fixed multiplying factor, it is multiplied by the determined value of PBDIT.
- Either the fixed percentile of the turnover or the multiplied value of the PBDIT with the fixed multiplier value is considered as the eligible home loan amount that can be sanctioned.
LTV based on the turnover factor:
The Loan-To-Value for this type of housing loan is supposed to be only up to 75%. In few cases, the lenders allow up to 80% and it solely depends on the bank or the financial institution involved.
Kindly check out another blog on Home loans to know more!