Rejection is one of the worst feelings in the world, especially when you dedicate yourself to accomplishing one of your dreams. You might be working up the courage to ask a girl out, putting in extra hours of study to get into NUS, or spending years saving up for your dream home… just to see your efforts go down in flames, Hindenburg-style.
I hate rejection just as much as you do. But it does serve a purpose – it tells us what we need to do in order to get what we want. That’s especially true when it comes to your home loan. And due to MAS cooling measures, home loan rejections are on the rise. So be prepared, but not discouraged if you get one.
Here are the 3 most common reasons why banks reject home loans:
1. Your Income Isn’t Enough for Your Desired Loan
Income is still the biggest deciding factor when it comes to your home loan. That’s because for HDB and bank loans, you’re restricted by how much of your income you can use towards your home loan, called the Mortgage Servicing Ratio (MSR).
Less than a year ago, the MSR percentage was 35%, but now it’s 30%. A 5% difference may not mean much when it comes to some things – but when it comes to your money, it’s a huge number!
If your salary is $5,000, here’s how much of it you can use towards your home loan:
- Early 2013: 35% of $5,000 = $1,750
- Today: 30% of $5,000 = $1,500
So if your bank calculates your repayments on a 4-Room HDB flat at $1,550, it’ll reject your home loan application because your MSR was 1% over the limit.
What you can do: If your home loan is rejected because your income is just too low to afford the monthly payments because of the 30% MSR, there are two immediate options that can help you get approval:
- Pay a higher down payment so that your monthly loan repayments are lower.
- Choose a less expensive home that’s within your MSR limit.
2. You’ve Got the Income, But Too Many Debt Commitments
Having a good income is no guarantee that you’ll get your home loan approved. Even if you’re making five figures monthly, if you have too many debt commitments eating into your income, banks will reject you faster than a supermodel at Pangaea who only dates billionaires.
That’s because banks also factor your Total Debt Servicing Ratio (TDSR), which is the maximum percentage of your income that can go towards paying your new home loan AND all other debts including car loans, renovation loans, education loans, credit cards, and other secured/unsecured debts.
Today, you need a TDSR of 60% in order to qualify for a home loan.
Let’s compare two home buyers so you can get a better idea of how TDSR works:
|
Home Buyer |
Monthly Salary |
Total Monthly Debts |
New Home Loan Monthly Repayments |
TDSR Percentage |
| Tim |
$15,000 |
$7,000 |
$2,750 |
$9,750/$15,000 = 65% (FAIL) |
| Mark |
$7,000 |
$2,000 |
$1,990 |
$3,990/$7,000 = 57% (PASS) |
What you can do: As you can see above, it really doesn’t matter if you’re making 2X more than another home buyer. If your TDSR percentage is too high and your home loan application gets rejected, you’ve got two options:
- Pay down your debts
- Choose a less expensive home with lower monthly repayments
Also, given that your credit card debt is taken into account, it’s more important now than ever to make sure you use the right credit cards and shave off the excess debt. That’s where sites like MoneySmart.sg can help you to find out which card suits your needs best.
3. Bad Credit Histories
Banks don’t just look at your income and how many debt obligations you have when screening your loan application for approval – they look at your credit history too! For banks, seeing a credit report that’s littered with late or missed payments is akin to a vampire seeing sunlight – they recoil in terror at the sight.
The biggest reason that banks flat out reject applications from buyers with credit problems is that they aren’t 100% confident that you can make timely payments on a home loan on time or worse – that you’re a default risk based on past credit behavior.
Fortunately, credit can be repaired over time by simply making repayments on time and paying off any outstanding debts. But it’s not just late payments that can hurt your credit score, as using too much credit or opening too many accounts will hurt your score too! So keep that in mind when working to repair your credit.
What you can do: That depends on your credit history. If you’ve been late on a few payments over the last year, make sure you pay on time during the next 6 months and then reapply. That should do the trick of fixing any credit mishaps that gave the bank reason to worry in the first place.
If you’ve been late on or missed quite a few payments over the last year, you’ll need to get serious about paying your debts back on time for up to a year before reapplying again. Follow us on Facebook as we talk more about how you can repair bad credit ratings and clear your debts.
An Easier Way to Find Out If You Can Afford That Home
Waiting in suspense for the bank to get back to you with an answer on whether they’ll approve your loan can be stressful. Receive a rejection of your loan request and your stress is doubled! But you don’t have to wait weeks for a bank to send you an In-Principle Approval (IPA).
That’s because you can find out whether you can afford that home in minutes with the new MoneySmart Loan Affordability Calculator. Now, you can plan your home buying decision even earlier so you can find out not only if you can afford that home, but what you need to do if you can’t afford it.
Click here to use the MoneySmart Loan Affordability Calculator now!
Has your home loan been rejected recently? Tell us about your experience here!
Image Credits:
Sean MacEntee