Are you financial healthy enough to get your home loan application approved?
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 installments.
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.
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.
Estimated for Income VS Property Targeted
This Income simply show you which property should be with in your target range. The calculation is a basic estimated of income vs property that you afford.
This sample income for Individual only (For Joint borrower please consult me for calculation), below are gross income before minus EPF and SOCSO, with no addition loan like Car Loan, PTPTN or Private Loan. For more accurate calculation you can consult me at: Eric Liew
RM 2,000 - RM 100,000
- Monthly Repayment for 30 year 90% Loan of 90,000 (4.5%) = RM 460 / Month.
RM 3,000 - RM 200,000
- Monthly Repayment for 30 year 90% Loan of 180,000 (4.5%) = RM 900 / Month.
RM 4,000 - RM 300,000
- Monthly Repayment for 30 year 90% Loan of 270,000 (4.5%) = RM1400 / Month.
RM 5,000 - RM 400,000
- Monthly Repayment for 30 year 90% Loan of 360,000 (4.5%) = RM 1800 / Month.
RM 6,000 - RM 500,000
- Monthly Repayment for 30 year 90% Loan of 450,000 (4.5%) = RM 2280 / Month.
RM 7,500 - RM 600,000
- Monthly Repayment for 30 year 90% Loan of 540,000 (4.5%) = RM 2700 / Month.
RM 8,500 - RM 700,000
- Monthly Repayment for 30 year 90% Loan of 630,000 (4.5%) = RM 3200 / Month.
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% (This mean your total loan should not exceed 60% total Income after minus EPF and SOCSO).
Here’s a sample calculation of DSR based on an applicant with a monthly net income of RM5,000 (Gross Income should be around RM 5,650), holding several credit commitments and looking to buy a RM500,000 property.
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.
How debt consolidation works using a personal loan provided the following example:
If you are paying rent, credit card bills and car loan installments 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 you CTOS 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 emphasized. 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 CTOS.
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 CTOS, 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 CTOS regularly.
Your CTOS 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.
For more advice and assistant please contact me at : Eric Liew 014 288 5767