Bank just rejected your home loan application? There, there.. dust yourself off and check out our 4 tips that will help you succeed the next time round.
You are finally closing in on your goal of securing your dream home. You’ve managed your finances well, scouted for a house which fits your budget, determined a monthly repayment that you are comfortable with, carefully filled up the required forms and nervously handed it over to the bank officer.
After weeks of nail-biting, you are served with bad news – your loan application was denied! To make matters worse, the bank officer can’t give you a valid reason for the rejection and so, you are left wondering what and where you could have gone wrong.
Although Malaysia’s household debt has decreased slightly to 83.2% (as of September 2018), banks are still prudent with their loaning requirements due to the country’s recovering economy. As such, it is essential that you do a thorough due diligence before attempting to resubmit your home loan application.
Here are 4 tips that you can put into practice to ensure a successful outcome:
1. Determine your CCRIS report pitfalls
These days, it’s rare to find anyone who isn’t aware that they must first check their credit score via The Central Credit Reference Information System (CCRIS). This system reflects your past 12 months of credit activities and shows the bank whether you are a good or bad paymaster.
However, the buck does not stop at having a great credit score. There are other factors which might skew your report. For instance, did you know that all of your loan rejections are also reflected in your CCRIS? This can prove to be fatal for those that cast a wide net by submitting loan applications to multiple banks. Banks would usually be aware of any prior rejections via their CCRIS record, and thus, applicants would have to wait between 3-6 months before attempting to apply for another loan.
As such, it’s wise to improve on your credit score before your next attempt. If you have multiple credit cards and loans attached to your name, making timely payments could help show that you are able to manage your commitments and are a good paymaster.
Besides that, zero obligations is not necessarily a good thing either. Keep in mind that banks would also be reluctant to approve your loan application if your CCRIS report is blank or ‘clean’ – where there are no credit cards/loan/overdraft facilities under your name. Better to have at least one active credit facility with timely payments to prove to the bank that you are able to take on and handle debt obligation responsibly.
2. Determine the best bank DSR (which will match your DSR)
Another important aspect that needs to be considered is your Debt to Service ratio (DSR) which is the calculation of your debt against your monthly income.
DSR = (Total commitment ÷ Nett Income) x 100
One of the most common reasons why banks would reject a loan application is if the applicant’s DSR is above the bank’s maximum allowable DSR. This can get tricky as every bank will have their own respective guidelines for the maximum allowable DSR that they are willing to accept.
It could be affected by various factors such as income, age, qualifications and even your net worth. The most ideal DSR range would be between 50%-60% as it would hit below the maximum allowable DSR of many banks and thus the likelihood of loan approval would increase.
If your DSR is the reason why your loan application was rejected, don’t worry! You can start improving your DSR by either reducing your current debts or by consolidating your unsecured loans and credit card bills. Check out LoanCare, which calculates and uses your DSR to help you compare home loan products across at least 10 banks in Malaysia.
3. Prepare at least 6 months of documentation
Regardless of whether you are a salaried employee or a freelancer, keeping meticulous records of all your financial documents is especially beneficial as the bank requires proof of financial capability.
In order to make your life much easier when it is time to submit your loan application, it’s advisable to keep on hand a record of the latest 6 months’ documentation of the following:
(a) EA Form/Form BE/Form B: Always file and pay your income taxes within the prescribed dateline.
(b) Salary slip/proof of income: Banks will require a continuous monthly record of your proof of income whether it’s salary slips or business banking statements. As such, make sure that your records are well organised with every month accounted for.
(c) EPF statements: This will not be a problem if you are a salaried employee as both you and your employer are required by law to make monthly contributions to your EPF. However, if you are a freelancer, consider making voluntary monthly contributions as a way to boost your credit portfolio.
(d) Bank account statements: Having either a current account or a separate saving account with a steady and consistent balance is another method that can help bolster your image as a responsible and credible borrower.
4. Keep tabs on Bank Negara Malaysia’s latest borrowing regulations
With the country’s current slow but fluctuating economic growth, it’s beneficial to keep yourself updated with the latest Bank Negara Malaysia (BNM) borrowing regulations and not depend on word of mouth from friends or relatives. The most significant of BNM’s revisions happened in 2014.
Prior to that, homeowners were allowed to get their homes refinanced for up to 90% of its value with a maximum repayment tenure of 35 years, and were able to use the cashed out portion for investments. But in the 2014 revision, BNM capped the tenure of personal loans at 10 years.
So why does this matter? Well, take this example: your existing home loan with Bank A is RM400,000 and perhaps because of lower interest rates, you want to refinance your home for RM550,000 at Bank B. The additional RM150,000 would be classified as a personal loan and the 10-year repayment tenure would kick in.
This means that the DSR of the cashed out portion would be calculated using the 10-year tenure, resulting in a much higher DSR and thereby affecting your overall credit score and potentially leading to your loan application getting rejected.
Besides that, BNM recently shared that many banks were using unfair T&Cs in housing loan contracts. BNM has assured that it will be releasing a set of standard T&Cs soon to keep Financial Service Providers in check – where they must act in good faith by ensuring fairness of contract terms, provide clear and concise product information as well as offer appropriate advice/recommendation based on the needs and financial circumstances of loan applicants.
As a savvy consumer, you would want to equip yourself with these standards once it is out and study your rights as a financial consumer before approaching a bank for a home loan.
In the meantime, check out A beginner’s guide to Islamic home financing in Malaysia.