Can You Get Approved For A Home Loan?
If you are finally ready to achieve your goal of buying a home this year, congratulations!
But first, it’s time for a reality check. Are you financial healthy enough to get your home loan application approved?
According to housing data from Bank Negara Malaysia (BNM) for the third quarter of 2018, housing loan approval rates are at the lowest in the last 5 years. BNM cites housing unaffordability and mismatch between supply and demand of houses that most Malaysians can afford to buy.
The housing loan tenure was capped at 35 years back in 2013 and this move by BNM has tightened the conditions for many prospective homebuyers to be able to qualify for the home loan as they find it hard to demonstrate that they can afford the monthly instalments.
One of the biggest factors for banks to decide whether to approve your housing loan application is your financial health and your credit score is one of the ways for them to assess if you are financially ‘healthy’ enough to afford your own home.
While your credit score is not the only factor to determine your eligibility for a home loan, it forms an important part of the decision for your creditor to approve your home loan.
So, before you make one of the biggest financial moves in your life to own a home, it pays to do your homework before diving in.
What is a home loan?
A home loan is one of the largest debt that you will take on and will have longer repayment terms with substantial interest payments involved.
There are various types of home loans in the market but all of them require some form of down payment as well as collateral, charges and fees including the stamp duty and mortgage insurance.
These loan products range from basic term, semi-flexi to fully flexi home loans as well as the option of conventional or Islamic home loan.
|Fixed every month||Additional payment on top of normal monthly instalment allowed||Additional payment on top of normal monthly instalment allowed|
|Linked Current Account|
|Treated as pre- payment for future instalments||Automatically reduces principal amount||Automatically reduces principal amount|
|Withdrawal of additional payment from linked Current Account|
|No||Yes, but subject to request and bank’s approval||Yes. No request required|
In fact, every prospective house buyer should first check if they qualify for a home loan before committing to any monetary terms for the property.
It’s important to keep in mind how much debt you can take on when applying for a home loan as financial institutions will first look at your debt service ratio (DSR) before proceeding.
Check your debt service ratio
This is the yardstick used by financial institutions to calculate your capacity to take on a loan compared to the amount of money you make in the form of income.
Different financial institutions have different DSR limits and applicants who can demonstrate higher income capability may be allowed higher DSR limits by the credit issuer. As a general guide, applicants should not exceed a DSR of 60%.
Here’s a sample calculation of DSR based on an applicant with a monthly net income of RM5,000, holding several credit commitments and looking to buy a RM500,000 property.
|Sample calculation of DSR|
|Monthly income of RM5,000|
|Car loan instalment RM800||Other loan instalments (PTPTN, credit card) RM300||Total: RM1,100|
|Home loan application|
|Loan amount (after 10% down payment)|
|Loan tenure of 30 years||Interest rate at 4.50% p.a.||Monthly home loan instalment: RM2,280.08|
|What is your DSR|
|Total monthly commitment (incl. home loan: RM1,100 + RM2,280.08 = RM3,380.08||Percentage of debt commitments in a month: (RM3,380.08/RM5,000) x 100 = 67.6%||You are 7.6% over your DSR!|
The percentage of your DSR will help financial institutions determine if the loan applicant is over-burdened with loan commitments and help them decide whether to proceed with your loan application.
One way to improve your DSR is to clear off smaller debts or consolidate them at a lower single interest rate to help you clear the debt faster.
Our recent article on how debt consolidation works using a personal loan provided the following example:
|Debts/Loans||Interest rate||Monthly repayment||Duration||Total interest|
|Credit Card A - RM10,000||15% p.a||RM500||2 years||RM1,579|
|Credit Card B - RM5,000||15% p.a||RM250||1 year 11 months||RM790|
|Personal Loan - RM50,000||13.09% p.a.||RM1,140||7 years||RM45,760|
|Debt consolidation with personal loan of RM65,000|
|Debts/Loans||Interest rate||Monthly repayment||Duration||Total interest|
|RM65,000||6% p.a.||RM1,098||7 years||RM27,232|
If you are paying rent, credit card bills and car loan instalments in the run up to your home loan application, it is important to remember to pay them on time to build and maintain a good credit history.
Maintain a good payment history
One factor that will affect your credit score is your payment history.
Besides listing your current outstanding credit (including any other home loans, personal loans, credit card, hire purchase and bank overdraft in your name), a payment history on your iMoney CreditScore also shows whether you have been on-time, late and missing payments on past and current credit accounts as well as any outstanding non-performing loans.
The importance of paying your bills on time cannot be over emphasised. The same goes for avoiding having debt settlements, car repossessions, foreclosures, defaults or even more alarming red flags such as bankruptcies and legal suits in your payment history.
Negative items in your recent payment history in the past 12 months is given more importance compared to items which are several years old.
So, even though you might have missed payments in the past, the more effort you put into maintaining a good payment track record will be reflected in your iMoney CreditScore.
Make the effort to note all your payment due dates on the calendar so that you are less likely to miss them and work on meeting those deadlines. Set up payment reminders or automatic payments to ensure you never miss a payment.
However, if despite your best efforts on keeping up with your debt repayments, you are still faced with a low credit score, it doesn’t automatically disqualify you from a home loan.
Will a weak credit score disqualify you?
The minimum credit score you need to get banks to accept your home loan application vary on the collateral or guarantors you can offer the bank as well as the type of loan you require.
If you scored over 580 in your iMoney CreditScore, the chances of your home loan approval are good and the rest is down to your payment history and DSR assessment based on your lender’s requirements.
If your score is not where it should be, there are immediate steps you can take to improve it such as making your credit card payments on time each month, taking measures to reduce your debt or pay down existing debt and not forgetting to check your iMoney CreditScore regularly.
Your iMoney CreditScore can also alert you to inaccurate or missing financial records. If you do find information that should not be there, check out the cause of the error and take steps to query and dispute the misinformation to prevent your credit score being negatively affected.
Once you have set your heart on purchasing a home, focus on the steps you need to take to improve and maintain your financial health.
iMoney offers a free credit score tool called iMoney CreditScore to help you get a clearer picture of your credit worthiness to your prospective lenders. If your credit score hasn’t reached a satisfactory level to qualify for a home loan, then it’s time to make a plan to improve that number before applying for a home loan.