Reasons Why Your Home Loan Application Is Rejected By Banks
Getting a home loan approved by the bank is not as easy as it seems. The financial institute will review your application thoroughly to ensure that you will be able to pay off the loan within the stipulated amount of time. Upon getting a rejection for your home loan application, you should find out the reason behind the rejection and find a solution for it. However, not all banks are able to disclose their reason(s) for the rejection. Below are some common reasons for their rejections with the solutions to them.
Income comes from rental and/or yourself (aka. self-employed)
If you are self-employed or your income comes from renting out your place, the income will be subjected to a haircut of 30%. Simply put, only 70% of your variable income will be recognised as your gross monthly income by the banks.
For example: you are self-employed with a monthly income of $5,000. The bank will only use $3,500 to calculate the Total Debt Servicing Ratio (TDSR; more explained below). This makes it harder for you to pass the TDSR of maximum 60%.
What you can do is to either increase your variable income or get another income source from an employment.
Total Debt Servicing Ratio (TDSR)
TDSR is a ratio used to calculate the percentage of gross monthly pay that is being used to pay off existing monthly loans, inclusive of the loan that you are applying for. The percentage must be equivalent or below 60%.
In the event that it falls above 60%, what could be done is to apply for a smaller loan amount, opt for a longer tenure to decrease monthly repayment amount, pay off your other existing loans as soon as possible.
Long loan tenure
Despite the above solution to increase the loan tenure period, it is important to note that it should ideally not exceed 30 years. Additionally, the numbers of years of loan tenure + your age should not exceed 65, the current retirement age. If it does, the loan has a higher chance of it getting rejected.
What can be done is to take up a smaller amount of loan or to shorten the loan tenure period while ensuring that TDSR is not over 60%.
Bad credit score
Before approving your loan, the bank will look at your credit score to know if you have paid off your past loans on time and if you are suitable to receive a financial loan. A bad credit score will affect the probability of you successfully getting a home loan greatly. However, if you have not taken up any loans (no credit score), banks will be unsure of your creditworthiness and might also reject your loan application.
It is possible to know your credit score from Central Bureau of Singapore (CBS) (costs $6.42). After checking your own credit score, you will probably know your chances of getting a home loan before you even make the effort to apply for it, thus saving you the time and energy.
The only way to improve your credit score is to pay back your loans on time.