There are a lot of myths about what affects your property loan. If you go by rumour, everything in your life is a factor – from your job to your car to the pattern of facial hair you sprout on a bad week. We’re going to let you in on a secret: the process of loan approval is straightforward, and quite predictable:
The factors determining property loan approval
There are some variations on this list, depending on the bank you go to. But these are the basic factors that almost every bank will look at.
- Your Total Debt Servicing Ratio
- Your credit score
- Your age
- Income and source of income
- Remaining lease
1. Your Total Debt Servicing Ratio
Also referred to as TDSR, or any favourite Hokkien expletive (if you are an agent or developer.)
The TDSR is one of the most significant cooling measures imposed by the government. It is meant to prevent overleveraging (too much borrowing), and to push home prices down.
When you apply for a home loan, the bank will compare your debt obligations to your monthly income. Your total debt repayments each month, after getting the property loan, must not exceed 60 per cent of your monthly income. For example:
Say you are applying for a loan of $2 million, with a 30 year loan tenure. The monthly repayments are around $7,300.
In addition to this, you have:
- A car loan, for which you pay $1,500 per month
- Various personal instalment loans, for which you pay $1,200 per month
- The remnants of your university education loan, for which you pay $400 per month
With the property loan, you would be obliged to make total monthly repayments of $10,400.
Your monthly income is $25,000. Your repayments come to around 41.6 per cent of your total monthly income – this is your TDSR, and you would qualify for the loan.
If your TDSR would exceed 60 per cent, the loan will either not be approved, or you will be asked to lower the amount you’re borrowing.
If you apply for a personal loan to cover the down payment, that loan is factored into your TDSR. So try to avoid that.
Do not mistake the TDSR for the Mortgage Servicing Ratio (MSR)
You may occasionally come across a condition called the MSR. For example, the bank may require that you have an MSR of 35 per cent. This means that the monthly repayments from your home loan only cannot exceed 35 per cent of your monthly income.
In the above example (earning $25,000 per month), this would mean property loan repayments, irrespective of other debts, cannot exceed $8,750 per month.
You must still adhere to the 60 per cent TDSR limit, even if you meet the MSR.
2. Your credit score
Every bank will check your credit score when you apply for a loan. This is a number between 1,000 and 2,000, for which you will be assigned a grade. You can obtain your credit score for about $6, from the Credit Bureau of Singapore (CBS.)
At 1,911 to 2,000 points, you will have a credit rating of AA. Assuming you meet the other conditions on this list, this often assures you will get the maximum allowable loan (80 per cent of the property value.)
Foreign buyers should note that Singapore banks do not negotiate interest rates for high risk borrowers. The interest rate on your home loan will not be adjusted to make up for your risk profile: your loan is either rejected, or you are asked to take a smaller loan.
If you have never taken a loan in your life, your credit rating will be Cx. This is not as good as AA, as it means the bank has no idea who they’re dealing with.
For this reason, a lot of borrowers take small loans or use credit cards (which they pay back religiously) two to three years before taking a home loan. The idea is to have the coveted AA score by the time of your application.
Foreigners often start with a credit rating of Cx. There is no inter-border data exchange for credit scores; banks here can’t check your credit score back home via the Credit Bureau of Singapore (although some might request you present a credit report from home.)
For former bankrupts or defaulters:
Bankruptcy is removed from your credit report five years after receiving the official letter of discharge. You should be able to apply for a property loan normally at that point.
Records of default are removed after three years, assuming the debt was settled (e.g. paid through debt restructuring.) If the debt was written off with no attempt at repayment, it will remain on record indefinitely; this can result in rejection or a smaller loan.
3. Your age
The loan tenure has a maximum of 35 years. In addition, the sum of the loan tenure and your age must not go beyond the retirement age of 65. So if you are 40 years old at the time of application, you have a maximum loan tenure of 25 years. Explaining to the banker that this wouldn’t have happened “in your day” is not helping.
4. Income and source of income
Income matters due to the TDSR (see point 1.) If you have a regular pay check this is straightforward. But if you are self-employed, your income may fluctuate.
For these variable income types, a 30 per cent haircut is imposed. So if you earn $10,000 per month, you will be treated as if you earn $7,000 per month for the purposes of meeting the TDSR.
Your loan application be rejected due to lack of proper documentation. If your income is not revealed in your CPF statements or IRAS tax forms, you will need to produce some other form of proof, such as client pay slips.
When determining the loan amount, the bank will use the official valuation of the property. Not the seller’s asking price, but the official valuation. If the seller asks for $2.3 million, and then valuation says the house is worth $2.2 million, the bank is going to base the loan on $2.2 million.
You can go to different banks to get a different valuation.
Beyond dollars, banks will factor in conditions that may make the property difficult to sell. For example, almost no bank will give you a loan for properties in the red light district of Geylang.
6. Remaining lease
If you found this article helpful, 99.co recommends TDSR and LTV ratio: Should this cooling measures be reviewed? and Why is my home loan being rejected.
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