One of the milestones in life is making the decision to buy a home. So, you look around and finally decide on buying a cosy little apartment. However, when you apply for a housing loan you realise that your bank has rejected the application. Why would they do that when everything seemed to be in order? Well, the devil is in the details. It is the little seemingly inconsequential things that the banks look at when it comes to approving or rejecting your home loan application. Here are 7 reasons why your home loan may be rejected:
It should come as no surprise that your credit score or the score of the joint applicant affects whether the bank approves your loan or not. If you have defaulted on your credit card payments or always pay after the due date, your credit score is bound to take a hit. Banks are less likely to lend money to applicants with a bad credit history. So, what can be done? Well, ensure that all your payments are made before time for at least the next 12 months. This way your score will improve and you can then apply for a home loan.
Legal problems can be a deterrent to your housing loan application. Properties under litigation won’t be approved by banks for mortgage. If there are legal charges pending against you or you are facing a lawsuit, then banks will require that your legal issues be settled first before your loan request is approved. Similarly, if you are an undischarged bankrupt (still going through the bankruptcy process), then your request for a home loan will be approved only 5 years after you have been discharged from bankruptcy.
The Total Debt Servicing Ratio (TDSR) is a check placed to keep you from taking on too much of debt. The current TDSR limit is 60%. This means that your credit commitments, which include any outstanding loans, cannot exceed 60% of your income. If you have already exceeded your TDSR limit, then your request for funds to buy a new house may be rejected by the bank. The way to remedy this is to settle other loans you may have or request your bank to increase the tenure of your loans so that the monthly instalment amount is reduced. You could also provide your bank with collateral in the form of bonds or other assets to help increase the amount they are willing to lend you.
If you want at least 80% of the loan amount that you have requested for, then the tenure of your loan and your age shouldn’t exceed 65. What does this mean? For instance, if your age is 43, then your loan tenure cannot exceed 22 years since 43 + 22 = 65. This is, however, dependent on whether you have any other outstanding debts or not. This doesn’t mean that if you are younger you can extend the loan tenure as long as you want, because the tenure for private properties cannot exceed 35 years.
If you are self-employed, then passing the TDSR becomes harder than those who are employees of an organisation. This is because banks determine your TDSR based on your latest Inland Revenue Authority of Singapore (IRAS) Notice of Assessment. For new business owners, getting a housing loan may prove to be especially difficult because you will receive your first tax assessment only post the financial year. So, a business that you start in January 2017, will receive its first IRAS Notice Assessment only in May 2018. Applying for a loan during this period will lead to the bank rejecting your application since they won’t recognise any income that you have made.
If rent is your source of income, then banks need a Tenancy Agreement that has a validity of at least 6 months left, as well as a copy of the Stamp Certificate so that they know that your stamp duty has been paid. If any of these criteria aren’t met then your bank may reject your application for a home loan.
In-between jobs with no other source of income? Then, it is more than likely that you will not meet the income requirements for a housing loan and the bank will not give you the funds. You can consider reapplying for a housing loan a month after you receive your next job since the bank will require at least your first month’s payslip before they can consider loaning you the amount.
You may think that making inquiries at various banks for credit may be a good idea. However, if a number of credit institutions have accessed your credit report in the last month, then your credit score will be affected. Banks will think that you are credit hungry and this could reduce your chance of having your housing loan approved. It is good to do your research, but avoid making too many credit inquiries in the month or two before you decide to get a housing loan.
These are some of the reasons why your application for a housing loan may be rejected by your bank. This doesn’t mean that you can’t purchase the home of your dreams because it is possible to clear all of these factors. Once you do that, your dream home will then become a reality!