At a glance...
There are many reasons as to why your home loan may be rejected — and it is not an uncommon sight. Since 2014, there has been an implementation of new rules and regulations for getting a home loan. So, if your home loan has recently been rejected, here are some reasons and solutions to help.
Total Debt Servicing Ratio
The Monetary Authority of Singapore (MAS) had passed the Total Debt Servicing Ratio (TDSR) framework back in 2014. This TDSR framework caps your loan repayments to 60% of your income.
This means that your loan repayments will not be able to exceed 60% of your monthly income. This also includes your home, car and personal loans. Thus, if your home loan will result in your monthly repayments to exceed the limit, your application would be rejected.
For loans that are flexible, such as credit cards, the minimum monthly repayment will be when calculating the TDSR limit. If your application is rejected due to this, try paying down your loans before attempting to apply again. Alternatively, you can take a smaller loan or stretch out the loan tenure, lowering your monthly repayments.
Haircut on Variable Income
If you have a variable income, a ‘haircut’ of 30% will apply. Variable income includes those who have a commission-based salary, collects rental income or runs a business. This means that your monthly income is counted as being 30% lower when calculating TDSR.
Thus, if your monthly income is $10,000, it will count as being $7,000. Thus, your TDSR limit will be 60% of $7,000 a month.
To avoid this, you will need to either increase your monthly income or be a salaried employee.
If you are currently bankrupt, you will not be able to apply for a home loan.
If you were previously bankrupt, you will need to check the date on your official letter of discharge from bankruptcy. This is as some banks wait 5 to 7 years before granting you a home loan.
You can try approaching non-banking financial institutions for a loan, however, do note that they may have higher interest rates that regular banks. Alternatively, you can get a guarantor to help back up your home loan application.
Lack of Proper Documents
If you lack proper documents to support your home loan application, your application will be rejected. At the very least, you will need to provide your Notice of assessment from the IRAS to be able to be qualified for a home loan.
If you are self-employed, note that you will need at least 2 consecutive years of income statements.
If your age plus loan tenure exceeds the retirement age of 65, your maximum loan ration reduces to 60%. This means that you will only get to borrow up to 60% of your original property price.
The Income Weighted Average Age (IWAA) is calculated if there are two or more borrowers. This is calculated as:
(age of borrower 1 x monthly income of borrower 1) + (age of borrower 2 x monthly income of borrower 2). This amount is then divided by the total income of both borrowers.
You can calculate your IWAA and tweak your loan tenure accordingly. This may mean taking smaller loans each month or switching up the co-borrowers if possible.
The bank you apply to will assess your credit rank, accessible from the Credit Bureau of Singapore (CBS).
If your rank is BB or lower, there is a higher chance the bank will decline your loan. This rank results from late payments or purchasing large amounts of credit in a short time.
If you have no credit rank, this means you have never taken a loan before. Banks may also be equally hesitant in this case. Check your credit score on CBS to spot any inconsistencies in your score. This will allow you to rectify your issue before reapplying for the loan.
If you have a bad credit score, repaying small loans on time reliably will help to improve your credit rank.
If you are not able to show 2 years of consecutive employment history, most banks are unlikely to grant you a loan.
If you are self-employed, you will need to show them at least 2 years of stable income.
Staying at a job for at least 2 years will help with your next loan application.
If the property you are purchasing is in a ‘problematic’ zone, banks are less likely to grant you a loan.
These ‘problematic’ areas include:
- Certain parts of Geylang, including red-light areas
- Properties with less than 30 years on the lease
- Properties with large defects
- Properties that are declining in value
As all banks are different, try another bank which might grant you a home loan for a property in these locations.
If you are unsure of which bank you want to go for, you can compare home loan rates here, and find one that works best for you!