Plenty of Singaporeans are caught off-guard, when their home loan application is rejected. This may surprise you, especially if you’ve gotten a home loan before; since 2014, new rules and regulations have kicked in. Here are the typical reasons to look for:
Key highlights –
- If the last time you bought a house was before 2014, your home loan could have been approved then but turned down now. This is due to new restrictions on age, and the Total Debt Servicing Ratio framework.
Reason #1: The Total Debt Servicing Ratio
In 2014, the Monetary Authority of Singapore (MAS) passed the Total Debt Servicing Ratio (TDSR) framework. The TDSR caps your loan repayments to 60 per cent of your monthly income, inclusive of all loan obligations.
For example, say your monthly income is $6,000 per month. Under the TDSR, your maximum monthly loan repayments – inclusive of your home loan, car loan, personal loans, etc. – cannot exceed $3,600, or 60 per cent of your monthly income.
(For loans with flexible repayment, such as credit lines and credit cards, the minimum monthly repayment is used to calculate TDSR limits).
If your home loan would cause your monthly repayments to exceed the TDSR limit, the application will be rejected.
- Pay down your loans aggressively, before your next attempt to apply for a home loan
- Stretch out the loan tenure, to lower monthly repayments
- Take a smaller loan
Reason #2: Haircut on variable income
If you have a variable income, such as having a commission-based salary, collecting rental income, or running your own business, a “haircut” of 30 per cent will be applied. That is, your monthly income will count as being 30 per cent lower for the purposes of calculating your TDSR (see reason 1).
So if your monthly income is $6,000, it will count as being $4,200. Your TDSR limit would be 60 per cent of $4,200, or $2,520 per month.
- There’s not much you can do about this, other than to increase your income or become a salaried employee.
Reason #3: Bankruptcy
If you are currently bankrupt, you won’t qualify for a home loan.
If you were previously bankrupt but have since been discharged, then note the date on your official letter of discharge. Most banks will wait till five years after your official discharge from bankruptcy, before granting you a home loan. Some banks may require seven years.
- You can try to approach non-banking financial institutions for a loan. However, be aware that the interest rate may be much higher.
- Get a guarantor to backup your home loan application
Reason #4: Improper / lack of documentation for income sources
You must, at the very least, be able to provide your previous years’ Notice of Assessment from the Inland Revenue Authority of Singapore (IRAS).
If you’re self-employed or a business owner, or have rental income, you will need at least two consecutive years of income statements.
Without these records, the bank cannot grant your home loan application.
Reason #5: The IWAA
If your age plus your loan tenure exceed 65 (the retirement age), your maximum Loan-to-Value (LTV) ratio falls to 60 per cent (i.e. you can only borrow up to 60 per cent of your property price or value, whichever is lower). The normal, maximum LTV is 80 per cent.
If there are two or more borrowers however, your collective “age” is your Income Weighted Average Age (IWAA). This is calculated as:
(Age of borrower 1 x monthly income of borrower 1) + (Age of borrower 2 x monthly income of borrower 2) / total income of both borrowers
Say you are 37 years old, and earn $6,000 per month. Your co-borrower, who is your spouse, is 29 years old and earns $4,500 per month. Your IWAA is:
(37 x 6000) + (29 x 4500) / 10500 = 33.57 (rounded up to 36)
This means that, if the two of you have a loan tenure exceeding 29 years, your loan will only be approved if the LTV is 60 per cent or lower.
Just reducing your loan tenure by one year (if you opted for 30 years) may qualify you for a loan at the full LTV of 80 per cent.
- Take a smaller loan
- Know your IWAA, and tweak your loan tenure accordingly
- Switch the co-borrowers if possible (e.g. take on your children as co-borrowers instead of your spouse), if it would improve the IWAA
Reason #6: Credit rank
The bank will assess your credit rank, which is available from the Credit Bureau of Singapore (CBS).
If your credit rank is BB or below, the bank may decline your loan. This usually happens because of repeated late payments, or because you sought large amounts of credit in a short time (e.g. opening two credit lines and applying for five different loans within a month).
Note that if you have no credit rank, because you’ve never taken a loan before, the bank can be equally hesitant. This is because there’s no proof that you’re responsible.
- Check your own credit score from CBS. You can obtain a report for $6.42.
- If you spot inconsistencies (e.g. you see a notice of default when you’ve never had one), raise a dispute to CBS immediately. Try to apply for the loan again, once the issue is rectified.
- If your credit rank is bad, then take out small loans and reliably pay them back on time. After a year or two of reliable repayments, your credit rank will probably improve.
Reason #7: Employment history
Most banks will not grant you a loan, if you cannot demonstrate at least two consecutive years of employment. If you’re self-employed, you must demonstrate at least two years of relatively stable income.
- Try to stick with a job for at least two years, before your next home loan application.
- Get a guarantor to back you up for the loan.
Reason #8: The property is problematic
Banks will not give out loans for:
- Properties in some parts of Geylang, notably the red-light areas (exactly which areas varies depending on the bank)
- Properties with 30 years or less remaining on the lease
- Properties with serious defects or complications (e.g. the property is infested or condemned)
- Properties with low or rapidly declining valuations (e.g. properties where the value has fallen by 10 per cent or more, for whatever reason, in the space of one to two years).
- Not all banks use the same valuation experts. Try different banks.
- If the property has 30 years or less on the lease, or is in Geylang, consider buying via a private contract (e.g. get a lawyer to draft a contract with the seller, so you can work out a payment plan directly with the seller).
If you found the information in this article useful, you may want to read more about deciding between a bank loan and an HDB loan and improving your credit score in relation to buying an HDB flat in 2018.