Home loan application rejected

Does your bank keep rejecting all your loan applications? We might know the reason why. 

Read on to find out more about loan applications in Singapore.

HBD loans and loans from a bank
Total Debt Servicing Ratio TDSR

Introduction

Nothing is more frustrating to a Singaporean than the rejection of his/her loan application. 

Do you think that being rejected by your crush is heartbreaking? You don’t even know what true heartbreak is. 

We have a saying when it comes to home loan applications in Singapore; Reject me once, shame on you, reject me twice, shame on me! 

If you didn’t understand that idiom, you definitely have a lot to learn. 

Banking regulations can be as strict as a frustrated headmistress in a convent school who loves talking down on kids. 

There’s no telling what kind of scrutiny you’ll face.

In fact, It’s possible that we Singaporeans face even more scrutiny when it comes to loan approvals than people from most countries. 

That fact is especially true if you’re applying for a home loan.

There are some common reasons for this, but the biggest reason is the implementation of new regulations since 2014. 

These changes brought some added restrictions to the applicant’s age, some new rules regarding income calculation, and the TDSR framework. 

The bank essentially calculates TDSR to ascertain your loan repayment capability. 

According to the banking regulations, the Total Debt Servicing Ratio is capped at 60%, including all your other loan payment obligations. 

This means that you’re not allowed to spend more than 55 % of your monthly income on repaying your loans.

So, if your income is $5000 per month, the bank will make sure that your monthly loan payment obligations do not exceed $2750 (60%). 

If your monthly payments for your personal loans are higher than this mark by their calculations, you might be looking at another instance of loan rejection here.

Income requirements for loan

What is a High Total Debt Servicing Ratio (TDSR)?

According to the monetary authority of Singapore, any property loan or mortgage application is capped at a 55 % TDSR threshold. 

If this threshold is reached or exceeded, the bank will deem your loan repayment capabilities too low, ultimately reducing your chances of approval. 

The Monetary Authority of Singapore (MAS) strictly enforces this rule and demands that any loans with an unusually high TDSR be immediately reported to them. 

In these cases, the MAS will want the applicant’s information, such as age, credit records, monthly income, etc.

However, the credit bureau might actually grant the despite the high TDSR rate in some cases. 

So, your chances of loan approvals may not be that slim after all. 

If that becomes the case for you, then you’ll be going through a more stringent and enhanced evaluation of your credit report. 

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Prevent Home Loan Rejection

How Does a Housing Loan Work in Singapore?

As a loan applicant in Singapore, it is crucial for you to understand how the housing loan process works. 

We will be doing this using a step-by-step guide that explains everything you need to know regarding housing loans. 

There are three types of properties for which a bank may offer you a loan. 

These are HBD flats, Executive condominiums, and other forms of private property. 

If you need a loan for an EC or any other private property, your only option is the bank. 

However, if you’re looking to secure a loan for an HBD flat, then you have the option to approach HBD. 

Difference between HBD loans and loans from a bank

The first step here is to understand the main difference between a housing loan from HBD and your bank. 

First of all, HBD loans provide higher financial support than bank loans. 

The maximum borrowing capacity for HBD loans is up to 90 % of the property price of market value, whatever is lower, with the minimum downpayment being 10 %. 

In contrast, the particulars for a bank loan are a maximum borrowing capacity of 75 % and a minimum downpayment of 25 %. 

The interest rates for HBD loans are set at 0.1% above the prevailing CPF interest rates, which is at 2.6 %. 

The rates for HBD loans often don’t change for a long time; the current rate has been valid for almost 20 years now. 

However, you shouldn’t consider this a fixed rate under any circumstance. 

Meanwhile, bank loans often have variable rates (fixed and floating). 

However, it is important to understand that even so-called fixed rates are only constant for a certain period of time. 

Therefore, it can be said that there are never any perpetual fixed rates for home loans in Singapore. 

Eligibility for Home loans

HBD and banks will run a background check on you to determine whether or not your credit score is eligible for the loan. 

Usually, your credit score should not be worse than BB, which is just below investment grade. 

Having a poor credit score will result in a low loan amount or even rejection. 

When it comes to bank loans, applicants who have gone through bankruptcy in the past will have to wait at least five to seven years after receiving the letter of discharge from bankruptcy. 

Foreigners must go through KYC regulations and may be asked to provide additional documentation. 

As a general rule, all banks demand that you meet the minimum requirements of income, loan to value ratio, and age limitations.

If you’re applying for an HBD loan, you will be subjected to the following requirements. 

  • At least one co-borrower for the loan must be a Singapore Citizen
  • You cannot take more than two HBD loans in your lifetime. This means opting for a bank loan for the third time. 
  • Combined income for families shouldn’t exceed $14000, extended family income is capped at $ 21,000, and single individual income, at $7000. 
  • You should not own another property while applying for the HBD loan. If you have recently sold a property, you need to wait 30 months before applying for the loan.
  • You shouldn’t own more than one commercial property. If you do, you must be the one operating it, meaning it can’t be a property you rent to someone else. Moreover, this must be your only income source. 
  • The lease period of the property must last until the youngest buyer is at least 95 years old. 

Income requirements for loan

The minimum required income for most conventional loans in Singapore is $ 24,000 per annum for single borrowers, while that number is increased to $ 36,000 if you bring in a co-borrower. 

If you’re a foreigner, you might be looking at twice the amount. 

Other than TDSR,  you will be subjected to the 30 % MSR ( Mortgage Servicing Ratio) when you buy HBD properties. 

This means you can only use 30 % of your monthly income to repay the loan. So if you and your co-borrower have a combined income of $ 6000 a month, you can only use $ 1800 to repay the loan. 

Regarding your overall finances, your balance to income ratio should meet the MAS regulations in any scenario. 

Other Factors

There are some factors that affect the total amount that you can borrow through a home loan. 

For example, the LTV ratio (Loan to Value) caps the borrowable amount to up to 90 % for HDB loans and 75 % for bank loans. 

There is a minimum age criterion of 21 years and a maximum of 65 years while applying for any loan in Singapore. 

The maximum loan tenure for HBD flats is 30 years, while it is 35 years for private properties. 

If the loan exceeds this period of time or crosses a point where your age is 65 or above, you will receive a lower LTV (55 %). 

Keep in mind that there will be legal fees and charges along with property taxes attached to home loans which will be rounded up in the closing costs.

Why was your home loan rejected?

There are plenty of reasons home loan applications get rejected by HBD or local banks. 

It could be that your credentials are lower than that of your fellow loan applicants, which would mean that there’s something risky about your financial condition. 

It could be that you’re a freelancer who does not have a regular job, which would make sense since job stability is one of the main requirements for a loan. 

Why is it so? Well, because a stable income guarantees that you will be able to pay back the loan without financially overwhelming yourself. 

Alternatively, you could get rejected despite having a stable job with a regular income. 

Another reason for the rejection of a loan application could be that you carry a bad credit history from your previous loans. 

Perhaps the reason is less complicated than that; perhaps you made a mistake during the loan application process, or perhaps they simply don’t like your face. 

Let us take a detailed look at some of the most common reasons why your loan application might have been rejected.

You have a bad credit score

It is always important to check your credit score with the Credit Bureau of Singapore BEFORE applying for a loan. 

This is because having a good credit score makes a better impression on bankers. 

After all, it’s basic common sense, If you have a bad or no credit score at all, then there is no proof that you can pay back your best on time. 

In this case, the best you can do is re-apply next year. 

Make sure that you make your payments regularly and on time for at least a year to positively impact your new home loan application. 

Banks always pay close attention to your financial record when you take a housing loan or a mortgage loan. 

They always do their due diligence and perform an accurate credit history check to prevent any cases of borrower defaults. 

So it is in your best interest to pay off all your credit card debt so you can have a clean credit history while applying.

Your source of income is Variable

It is common for your home loan to be rejected if you are in between jobs, are self-employed, or if you have income that is undeclared. 

If you’re a sole borrower, the minimum required annual income is $ 24,000. This number is increased to $ 36,000 if you’re using a combined income. 

Let’s take a hypothetical scenario; let’s say that you’re a theater actor who doesn’t have a fixed, regular income, meaning your income varies from time to time. 

If that is the case, the bank will want to see one year’s income slip to verify your finances. 

If you get approved, the banks will only consider, say, 70 % of your average income as a basis for your loan applications. 

So if you earn $ 5000 a month, the loan or mortgage will be based on only $ 3500. 

High Total Debt Servicing Ratio

TDSR plays a huge role in mortgage loan approval, and this is valid for almost any type of loan, not just loans for residential property. 

Banks will naturally reject your application by default if the TDSR exceeds 60 %. 

Your loan tenure is too long for the Bank

In Singapore, the maximum loan tenure for public property is capped at 25 years, while the tenure for private property is at 30 years. 

If you are seeking a loan from a bank, there might be 5 more years added to the loan tenure. 

However, it is important to note that the maximum age is 65 years for both bank and HBD loans. 

So a 40-year-old man applying for a home loan will have only get a tenure of 25 years. 

If he cannot meet the TDSR requirements for that tenure, the loan will likely be rejected. 

Reasons for a Rejected Home Loan in Singapore 

Repaying a home loan is a long-term commitment; Banks have to make sure that you can fulfil that commitment. 

That’s why they’re always extra careful when approving your loan application. 

The first thing they’ll look at is your credit score, which represents your loan repayment reputation. 

It’s important to know that banks don’t really appreciate late payments. 

If you are someone who often fails to repay their loans within the repayment period, or if you have tons of credit card debt on your back, your application will naturally be rejected. 

This is a sign that you might not be able to commit to a timely future repayment. 

If you’re acting as a loan guarantor for someone, and that person is unable to pay back his loans on time, it could hurt your loan applications even if you have a stellar record. 

If you tend to always change jobs, then your bank might deem you an unreliable person. 

Alternatively, you could have a great stable job, but if your bank has an issue with your job or employer, your loan might be rejected anyway.

There could also be some issues with the property you’re trying to purchase, which convinces the bank not to approve the loan. 

This could be because the building is too old or doesn’t follow the necessary guidelines. 

Alternatively, your loan is likely to be rejected if you’re close to retirement age. 

Last but not least, your loan will be rejected if there are some issues with your documentation. 

 

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What happens if the bank rejects the home loan?

Your loan might be rejected due to a plethora of reasons, but that doesn’t mean that it’s the end of the road for you. 

There are still some ways that you can get your loan approved despite being rejected the first time. 

The kind of measures you have to take depends on the reasons for your loan rejection. 

Loan rejected because of bad credit score

What you can do is settle all your previous or ongoing debts to increase your score. 

This will generally take a minimum period of 1 year. 

Loan rejected because of bad credit history

Settle all the dues with your financier and get an official ‘no dues certificate’, then try for the loan again. 

Financial eligibility does not match the criteria

You can try to increase the loan tenure to reduce the EMIs or get a co-applicant or a guarantor. 

Alternatively, you could look for a different lender who might approve the loan at a higher interest rate. 

If that’s the case, try to add more property as collateral or at least get a guarantor. 

Solutions to Prevent Home Loan Rejection

It can be quite frustrating if you’re unable to secure a loan despite taking the necessary measures. 

If that is the case for you, then perhaps you should stop trying to do this alone and get some professional help.

Property loans come with an array of strict rules that must be followed to the core, even more so in Singapore. 

Even the slightest mistake can trigger a red flag for your loan application. 

Successfully securing a loan entails having the property paperwork, choosing the right bank, and creating the best scenario for you. 

A financial advisor could easily help you with the right strategy for securing your home loan. 

Steps to fix the problems

Step 1, figure out why you were rejected in the first place! 

There may be various reasons why your loan was rejected; the first step is to find out why. 

Step 2, take the necessary steps to rectify the error.

Once you know why your loan was rejected, the next thing to do is ensure it doesn’t happen again. 

Build up your credit score slowly and steadily. 

If late payments are your issue, you could set up automated fund transfers to ensure timely payment. 

Step 3, Create a strategy that works.

It is normal for previous loan application rejections to become a natural deterrent for any potential future loans. 

So you want to apply with a strategy in place. 

Do your research and hire a financial advisor who can give your the property guidance. 

Improve your chances to be approved

There are two ways to improve your chances of getting your loan approved; Pre-Qualification, and Pre-Approval. 

A pre-qualification does not completely guarantee that your loan will be approved, but it significantly improves your chances. 

It is more of an informal assurance given to you by the lender. 

In any case, the main factor for getting approved still depends on your financial track record. 

So, if there are any inconsistencies found, the informal agreement goes out the window. 

Similarly, Pre-qualification is not a guarantee either; however, it does improve your chances by 90 %.

Tips to get a home loan easily

Before you apply for a loan, it is important to consider a few essential factors that can contribute to the loan’s approval. 

Pick the best place to get a loan from

In Singapore, you can either get a home loan from HBD or a bank. 

It is important to understand which of these two types of loans are you more likely to qualify from. 

The eligibility criteria for HBD loans differ from that of a bank loan, so think wisely. 

Another factor is whether or not you can afford the downpayment for the loan. 

Taking an HBD loan means paying 15 % upfront, while bank loans require up to 25 %. 

Moreover, if you plan to use your CPF funds, it makes more sense to take an HBD loan and use the CPF to pay the downpayment. 

Pick the best interest rate

The interest rate for HBD loans is a standard of 2.6 % per annum.

Meanwhile, there are no fixed rates for bank loans, but it is known that most banks allow you to borrow at an interest rate lower than 2.6 %. 

Calculate the TDSR, LTV and MSR

As we all know, a huge part of your loan approval relies heavily on the TDSR, LTV and MSR. 

As a loan applicant, it is important to conduct the necessary calculations to figure out what loan amount is more likely to be approved. 

Remember that your loan is more likely to get rejected if the amount you want to borrow does not tally well with these three factors. 

How difficult will it be to relocate?

There are three factors that directly affect each other regarding commercial properties; the property type, tenure and location. 

The property location is affected by the type and tenure, which are, in turn, influenced by the chosen location. 

Complicated, isn’t it?

Let us explain with an example; suppose you want to invest somewhere near the woodlands or Punggol. 

The only type of building you’ll find here are industrial properties with a 60-year leasehold.

Now let’s say you’ve bought it, and so far, things are going okay. 

However, as we know, anything can happen within 60 years. 

For example, a competitor could suddenly set up shop in the nearby area and start stealing your clients; or the property’s value could decrease after the first ten or twenty years. 

In these situations, whatever the case may be, moving your business to an entirely new location would be considered financial suicide. 

The sheer amount of money you’ll spend starting all over again may even result in bankruptcy. 

Needless to say, relocating is an expensive and dangerous concept for any businessman.

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