Self-Employed? Here's The Formula To Calculate Turnover For Home Loan
If you are a self-employed person, you probably know all too well how difficult the process of getting a home loan is. Lenders are always more suspicious when it comes to home loan borrowers who are not self-employed.
However, it does not matter how cumbersome the home loan appraisal is for the self-employed people. If you file your taxes, repay your existing loans on time, maintain a good credit score and keep your books, documents and records in order, your odds of getting a home loan are high.
If you think that you sufficiently fulfill all requirements mentioned above, you can ask your lender to ascertain the home loan amount you are eligible for, based on your gross annual turnover.
Each lender has a pre-assigned industry margin that depends on the segment under which the self-employed home loan aspirant falls. This is used as a multiplier to the turnover, in order to determine the eligible income.
MakaaniQ tells you more about the eligibility criteria for turnover calculation.
How home loan eligibility is calculated for self-employed
- Income from business can be used for calculating the home loan eligible amount
- The business of the self-employed must be registered, and at least three (two in some cases) years of income tax returns must be available
- Income from other sources like interest and rent can also be added to raise your home loan eligibility
- Income from enterprises such as companies, partnerships and proprietary concerns owned by self-employed people can be added to calculate their home loan eligibility
- Non-cash expenses (such as Depreciation) can be added back to the net income of the business to decide that they are eligible for a higher home loan amount
Understanding the “turnover method”
“Turnover” calculates how quickly business collects cash from accounts receivables or how fast the company sells its inventory, during a specific period.
Three financial benchmarks according to the audited financials for calculating the turnover are:
- Growth in turnover
- Cash profit (i.e. net cash receipts after deducting all cash expenses)
- Tangible net worth (i.e. total assets minus the total liabilities and intangible assets like goodwill, patents etc., it gives a clearer picture of the real net worth)
These are the requisites for inspection and banking of calculating the turnover
- Property and factory visits are mandatory for the inspection of business, assets and collateral
- The lender can visit the business premises even after the home loan is sanctioned/ disbursed if he finds is necessary
- Bank Statement for a period of twelve months or more will be required for calculating the turnover
- Banking habits are assessed in detail by the loan officer
- At least 50 per cent of the turnover must be reflecting in the Bank statement
How turnover is calculated
- Turnover calculation depends on the amount of net sales or turnover of the businessmen (like less or more than Rs 1 crore, which may vary from lender to lender)
- Every lender calculates a fixed percentage (which may vary from 15- 25 per cent) of the net sales or turnover of the businessmen
- Profit before Depreciation, and Interest and Taxes (PBDIT) are also calculated
- Lender, on the basis of the bank’s fixed multiplier for turnover calculation, considers ‘n’ times (i.e. the multiplier) of ascertained PBDIT
- Home loan eligibility is considered as the lower of the two values computed i.e. the fixed percentage of turnover or ‘n’ times the PBDIT, using the bank’s fixed multiplier
Lon-to-Value (LTV) under ‘Turnover scheme’
LTV for Home Loan is supposed to be restricted up to 75 per cent. But in some deserving cases it is allowed up to 80 per cent (the percentage figure may vary from bank to bank).
Also Read: LTV And FOIR For Self-Employed People