Just when you think you are one step closer to owning the home of your dreams, you find out that your home loan application is rejected by the bank.
So what should you do now? And why?
In this article, we examine possible reasons as well as alternative options and steps you can take to increase your chances of getting your home loan approved.
Possible Reasons For Your Home Loan Application Rejection
- Bad Credit Score
- The Home Is Beyond Your Affordability
- No Steady Source Of Income
- Too Many Other Commitments
- Having No Credit Score History
- Bad Financial Relationships
- Land Tenure Status
- Error In Documentation Submission
- Problems With The Developer, Seller Or Property
- The Bank
What Should You Do Then? Strategies & Alternative Options To Try
Possible Reasons For Your Home Loan Application Rejection
1. Bad Credit Score
Constantly defaulting and defaulting on your bill payments will lower your credit score. And the lower your credit score, the lesser your chances of securing a home loan from the bank.
The bank gauge your credit score by collecting and analysing data and information of your financial activities from various credit reporting agencies such as CCRIS (Central Credit Reference Information System) from Bank Negara and from private agencies such as CTOS, BASIS, RAM and others.
These agencies collect, compile and collate information and data about you in particular information that relates to your financial or credit standing which may include information of your payment of any existing credit facilities, credit card, loan and hire purchase, your shareholding or directorship or even legal suits in court
The bank will analyse these information to gauge and rate your creditworthiness and ability to pay your loan.
You may easily access online and in-person at Bank Negara Malaysia branch to view the CCRIS to get hold of your financial credit report from the many private agencies with payment of some small fees.
Other common things that affect your credit score are:
- Exceeding your credit limit (more than 70% of the combined credit limit)
- Applying for too many lines of credit at one time
- Having too many credit cards.
- Acting as guarantor for someone who delays and misses payments
- You are a director or shareholder of a company with bad financial record or your company is entangled in legal suits
2. The Home Is Beyond Your Affordability
It could be entirely possible that the price range of the home you have your heart set on is too high for you.
Whether you can afford a home is not just determined by having a monthly loan repayment that is lower than your income. Banks will also take into account your existing financial commitments such as car hire-purchase, credit card purchases, living expenses and other payments associated with homeownership when considering your eligibility for a home loan.
3. No Steady Source Of Income
When evaluating your eligibility for a home loan, banks will usually prefer that you have a stable job that you have worked at for a good period (at least 2 years is ideal) and consistent income – this tells them that you can repay your loans consistently and on time.
Do note that banks might be especially wary if your job is commission-based with a low basic salary. This is also true for those who are self-employed (e.g.: freelancers, business owners, consultants) where the source of income is unstable by nature.
4. Too Many Other Commitments
Having too many other financial commitments like loans and credit cards under your name will ruin your chances of securing a loan for your new home.
Again, banks will always want to know if you can afford to pay off your loans consistently. This is determined by not only your credit records but also your Debt-Service Ratio (DSR) – the ratio of your financial debts against your total income, which will show how much of your income is used to pay off your debts.
If your DSR exceeds 60% of your total net income,
5. Having No Credit Score History
Think you are safe because you do not have any credit in the form of credit cards or loans? Well, think again.
That is where you are wrong. Having no credit history is as bad as having a low credit score! Since you have no credit history, banks have no way to find out if you can be trusted as a good paymaster – and that is one risk that they are unwilling to take.
6. Bad Financial Relationships
Acting as a loan guarantor or taking loans on behalf of someone who does not pay up or is frequently late will also affect your credit score. The same goes with sharing bills.
7. Land Tenure Status
Did you apply for a loan on a leasehold property with less than 60 years left on the lease, or property subject to certain restriction? Then this could be the reason why your loan application is rejected.
This is mainly because these types of properties are considered high risk. Due to limitations and restrictions, banks will have problems reselling these types of properties in an auction. Not only that, the value of leasehold properties will typically decrease at the end of its lease.
8. Error In Documentation Submission
This may seem unlikely, but it does happen. Errors in filling up the application form or submission of supporting documents, especially income-related documents, could very well affect the approval of your home loan application.
It also goes without saying that lying or trying to forge important documents like your payslip is a no-no. Banks will find out, and worse, you might even get legal action taken against you.
9. Problems With The Developer, Seller Or Property
It is not you, it is them. And if this is indeed the reason you are rejected, consider yourself lucky – you have just dodged a huge bullet!
Often banks will also conduct checks on the developer/ seller to ensure that they are not bankrupt or blacklisted because of past negative dealings or court cases.
Also, if not, it could very well be the property. Banks also have a list of blacklisted properties for various reasons:
- Unfavourable locations that are flood or landslide-prone
- No strata title despite a long period
- Poor building structure
- Low marketability and high auction rates
- The property is very old and badly maintained
- Developer of the development has been wound-up
10. The Bank
Done everything right but still got your loan application rejected? It could be the bank.
Different banks have varying criteria for home loan approval and degree of willingness to take on risks. So the bank you applied to might just have stricter approval criteria that you cannot get past.
And it could also be the fault of an inexperienced officer handling your home loan!
What Should You Do Then? Strategies & Alternative Options To Try
Long Term Plan
1. Fix Your Credit Score
The good news is that a low credit score will not affect you forever – it CAN be improved over time as it is based on your credit history from the last 12 months.
Get your credit report to see what can be improved, and start paying your bills on time and clearing off your debts by paying them off consistently. It may take time, but trust me, it will be worth it.
However, since negative records will still be reflected in your credit record for up to 12 months despite being paid in full, it would be a better idea to wait until it is cleared to try applying again for a home loan.
Also, do not, I repeat, DO NOT close the credit account after repayment – this will work against you as it will shorten your credit history and in turn, hurt your credit score.
2. Check If You Are Eligible For A Loan
To spare yourself from disappointment, you should check your loan eligibility (Click here to check!). This will help you know if you can afford the home you want and narrow down your search for homes you can realistically afford.
Also, you should take stock of your monthly expenditures and financial commitments too so that you do not stretch yourself too thin.
Want to get a rough estimate of your monthly home loan repayment? Click here to check with GUYUB
3. Calculate Your DSR
Gather all info regarding your financial commitments (personal loans, credit card bills, car loans and PTPTN loans) and calculate your DSR with this formula:
DSR = Total Monthly Commitments + Mortgage You Applying For ÷ Net income (after deduction of tax, SOCSO & EPF)
Your DSR should not exceed 60%. If it does, you should try to reduce your monthly commitments. And you should ideally go and find out the DSR of banks, so you will know where to apply for the highest chance of approval for your loan application.
4. Maintain A Good Employment Record
At least 3 to 6 months of employment history is required for you to apply for a home loan.
Try not to switch jobs too often. Your mortgage application will be stronger if you have worked with your current employer for a minimum of 2 years or more, as banks value continuity of employment and stability of income source. You should also avoid switching jobs during the same time you apply for a home loan as it will also affect your application.
If you are a freelancer or self-employed, you should provide proof in the form of financial documents, such as your bank statements, income tax documents and other relevant documentation.
Other Steps Or Alternative Short Term Options
1. Check Your Documentation
Ensure that you have filled up the forms correctly and submitted all the relevant documentation required for your home loan application. This includes:
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- A photocopy of your I.C.
- Income tax documents (EA form, BE form or Form B)
- 3 to 6 months’ worth of payslips or commission statement
- Bank account statements (both personal and company, if applicable)
- EPF statements
- Property booking receipt
- Sales and Purchase Agreement/ Copy of Title
- Business Registration (if applicable)
- Letter of employment from your company
- Deposit statements from Fixed Deposit, Bonds or ASB, if any
2. Pay A Higher Downpayment
If you can afford it, you should! Not only does this mean that the bank gets to loan you a smaller amount, but it also shows the bank that you have the means to own a home and the discipline to be able to save and accumulate a big amount in your savings.
A plus for sure, especially when it comes to creditworthiness!
3. Apply Again At Another Bank
Again, this does not mean you should haphazardly send in applications to multiple banks at the same time – this will ruin your credit score!
Do your research – different banks have different criteria for loan approval so there may be other banks that are less stringent when it comes to approving your home loan.
Of course, you have to ensure that you already fit the basic criteria required for a home loan approval before you try this step. You could first get a home loan pre-approval with the bank to test the waters if you want to be extra cautious about ruining your credit score.
4. Share The Loan Burden
This is especially if you cannot qualify for a loan with your current income level. Applying for a joint home loan will significantly increase your chances of securing (higher!) financing for your home, as it takes into account the combined sum of you and your co-signer(s)’s income.
Again, for the joint home loan to be approved, the other party in the joint loan MUST have a good credit score and financial record. Banks are also more inclined to approve the joint loan between spouses or parent and child, rather than one shared between friends.
Also, you should take note of the risks involved. If your co-signer(s) is not able to continue to service the home loan, and you are not able to cover their part of the home loan, both you and his/her/their credit scores will be affected. A joint home loan will also potentially cause problems when it comes to making decisions regarding the property.
5. Explore Other Financing Options
You can also opt for Rent-to-Own schemes offered by some banks, where you enter an agreement to rent the home for a set period. At the end of the lease period, you can choose to buy the home at a locked-in rate at the time the lease was signed or forgo your chance.
Withdrawing from your EPF Account 2 is also one option you can try to help you cover the costs of property purchase.
If you are a first-time homebuyer, there are also other government financing schemes available for properties priced RM500,000 and below. This includes:
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- My First Home Scheme (SRP)
100% financing for properties between RM100,000 – RM400,000 - My Deposit Scheme
Up to RM30,000 downpayment or 10% downpayment (whichever is lower)
- My First Home Scheme (SRP)
With the many reasons and steps to improve your chances for a home loan, we hope that you will finally be successful in securing a home loan for the house of your dreams. All the best!
The statement and information in the articles are the opinion of the writer and meant only as a guide. Any property purchase, rental or lease involve many legal issues and other complication depending on the individual facts and circumstances. Readers and Users are strongly advised to seek professional advise including from qualified and competent lawyers, bankers and/or real estate agent to verify the information and the statement before embarking on any purchase, rent or lease of any property. To the fullest extent permitted by law, we exclude and disclaim liability for any losses and damages of whatever nature and howsoever cause and arising including without limitation, any direct, indirect, general, special, punitive, incidental or consequential.
