Are you stuck in a situation where you’ve applied to multiple banks for your housing loan and have gotten rejections from them, yet the bankers were unable to disclose the reason(s) to you?
Here, I’ll share some common loan application issues – the exact reasons why your loan was not approved and how you can “repair” the application.
1. You have bad credit ratings or bad repayment conduct
(Or perhaps the Joint Borrower.)
Credit card bills are always overdue or not paid in full. Late payments for your car loan or renovation loan. You may even have restructured loans. You have the tendency to delay or default on payments and the banks take all these bad habits into consideration when you’re applying for a housing loan.
This is typically the main reason for banks to completely reject the housing loan application.
You have bad credit, so what should you do?
Take immediate actions to ensure that full payments are made promptly before due; maintain it for at least 12 months (actually, maintain it for the rest of your life; it’s a good habit to keep anyway), before reapplying for the housing loan. It will put you in a much better position than before.
2. Too much liability, too little income
Do you have too many commitments? Are you not earning enough? Perhaps both?
The Total Debt Servicing Ratio (TDSR) has a 60% threshold and what this means is that the percentage of your income that goes into servicing your monthly loans and commitments (including this new housing loan you’re about to take up, or refinancing of your existing mortgage) cannot exceed 60%.
The TDSR Framework was implemented to cool down the property market, as well as to ensure that people do not overstretch their dollar.
Don’t be too alarmed when your banker tells you that you’ve exceeded the TDSR and hence unable to obtain maximum financing for the property. In today’s context, a middle-aged manager drawing $5000 salary per month, servicing a monthly instalment of $1500 for his car loan may not even get a $400k loan to purchase a private property!
For HDB owners and owners-to-be, take note that the MSR – Mortgage Servicing Ratio – has a 30% threshold and what it means is that your monthly instalment for the mortgage (stressed over 3.50% interest rate) should be within 30% of your income. You’ll have to pass both the TDSR and MSR for HDB, while only the TDSR is applicable for private properties.
You have failed the TDSR – what should you do?
Lower your loan commitments by settling your personal loan(s) or car loan(s) if any, or opt for longer tenure so the monthly instalment is lower. You may also pledge or show funds or other liquid assets (e.g.: stocks) to boost the loan amount.
3. In-between jobs
If you’re in-between jobs and without any other sources of income, it is likely that you will fail the TDSR and banks will not be able to grant you the loan.
For a typical salaried worker, banks will require at least the following documents in order to process your application:
- Latest 3 months computerized payslips,
- Latest 12 to 15 months CPF Contribution History, and
- Latest Notice of Assessment.
If you’re in-between jobs and hence unable to provide the above-mentioned documents, so what should you do?
The soonest you can try to apply for a housing loan is when you have a new employment. With the new employment contract, you can try applying to bank(s) for your housing loan. Some banks may require that you start your new job and obtain the first month’s payslip before they can consider your application.
If you have other sources of income (such as rental income) or a fat bank account, you may be able to still pass the TDSR and obtain financing or refinancing for your property.
4. Self-employed income/rental income
Self-employed and rental income are subjected to a haircut of 30%;this means that banks only recognize 70% of these income, making it harder to pass the TDSR.
If you are self-employed and have difficulties in obtaining financing for your property, so what should you do?
For the self-employed, the banks assess your TDSR based on your latest Notice of Assessment (some banks may even require the latest 2 years); it is therefore always wise to declare all the income generated from the business accurately.
For the new business owners, do note that you’ll only be filing for tax assessment the following calendar year so between now and then, the banks will not be able to recognize any income generated.
There are also certain criteria to be met before the banks can recognize your rental income. First, there has to be at least 6 months’ validity remaining on the Tenancy Agreement, and secondly, the banks will also require a copy of the Stamp Certificate to ensure that stamp duty has been paid duly.
5. Legal issues
If you’re currently in the midst of a lawsuit or if you’re an undischarged bankrupt, it is highly likely that your loan application will be declined.
Assuming you have legal issues, so what should you do?
With a pending lawsuit, you’ll have to wait till the issue has been settled before the banks can consider extending the loan to you.
For an undischarged bankrupt, you’ll first have to get discharged from bankruptcy and wait out a 5-year period from the discharge. In between the long wait, obtain any new credit facility with prompt repayment conduct before the banks can consider extending the loan to you.
The above mentioned are the more commonly-seen scenarios. We understand that all applications are unique. Unable to relate to any of them? Fret not, we are always here to help. Speak to our advisors today!
