Wondering why home loans are rejected? Here are the some of the usual rejection reasons for a home loan in Singapore.
It can be frustrating when your home loan is rejected, and some lenders may not tell you the reason. In this article, we’ve compiled some of the common factors that lead to your home loan being rejected:
Reason #1: Your Monthly Loan Repayments Would Break the TDSR Limit
There is a Total Debt Servicing Ratio (TDSR) of 60 per cent. This means that your monthly home loan repayments, plus any other debt obligations, cannot exceed 60 per cent of your monthly income.
For example, say you have a monthly income of S$5,000. You already have some personal loans, which require you to pay S$900 per month. At a TDSR of 60 per cent, your limit on loan repayments is S$3,000.
You then apply for a home loan, which would require you to pay S$2,500 per month. This would raise your monthly debt obligations to (S$2,500 + S$900)) = S$3,400. this is above your TDSR limit of S$3,000, so your loan would be rejected.
You may be able to get a loan approved by taking a smaller loan, or by extending your loan tenure.
Reason #2: Your Credit Report Is Getting in the Way
If you have a poor credit score, banks may reject your loan. There’s still a chance you can get one, but you may have to re-apply and ask for a smaller amount.
Note that, if you have bankruptcy on your credit record, it is not possible to get a home loan. If you are a discharged bankrupt (i.e. you have received the official letter of discharge from bankruptcy), you will usually have to wait five years before the bankruptcy is removed from your credit record.
Reason #3: The Bank Is Not Confident of the Property Value
Banks will not finance certain types of property. The most reason is that the remaining lease is too short. If there is only 35 years or less on the lease, banks may require you to borrow less, or may refuse to grant the property loan altogether.
Some banks may not finance houses they consider to be in undesirable areas, or in poor condition. An example would be a property in which the developers are residents are in court over home defects, or a property located in a red light district.
Not all banks evaluate risk the same way however, so you can try approaching a different bank. However, note that for properties with 35 years or less on the lease, it is improbable that you will find a willing bank.
Reason #4: A Haircut Is Being Applied on Your Variable Income
If you work on a variable income, such as by running your own business or living off commissions, a “haircut” will be applied. This is when the bank treats your income as being lower than it actually is, for the purposes of TDSR calculations (see point 1).
For example, say you make an average of S$8,000 a month, based on rental income. The bank will treat your income as if it’s S$5,600 per month, for the purposes of TDSR calculations.
There are some ways around this. You could find a guarantor for a loan, or put up some form of collateral (e.g. another property that you own, or a stock portfolio). The decision to accept such alternatives varies based on the bank.
Reason #5: Your Loan Tenure Is Too Long
If your loan tenure exceeds 30 years, or your loan tenure plus your age would exceed 65, your loan could be rejected. You have to either take a shorter loan, or just borrow less.
Reason #6: You Are Trying to Buy Property Abroad
Some banks will reject loans for overseas properties. This varies between lenders – some Singapore banks do finance loans for properties in Malaysia, or in capital cities such as New York, London, or Hong Kong. However, this is not a universal practice among banks.
As the policy varies between lenders, you’ll need to speak to several different banks before getting a loan. As a last resort, you may need to use a foreign bank (in the appropriate country) to secure the loan.
Summing It Up
While there may be myriad of reasons available, we hope these common home loan rejection reasons will help you in your next housing loan application. Some of them can be remedied quickly, whereas others may take some time. All the best and don’t forget exercise prudence with every financial decision!
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.