Two important factors that banks assess when approving a home loan are job stability and the employment of the loan applicant. These factors are important to guarantee a constant inflow of cash. That is why, if you are not able to prove your employment security to the bank, chances of your loan getting approved are thin as this represents a notable risk.

How do banks assess your home loan application?

First, let’s look at how the bank determines your eligibility for a loan. Different banks have different rules – you may qualify for a home loan with one lender but fail to reach the standards of another. Here are some of the factors your bank looks for when assessing your loan:

1. Borrowing Power

   Your capacity to borrow depends on factors such as sources of income, savings, existing debts, expenses and investments. The bank will assess whether you can add-on the loan repayments to your budget while still being able to afford your essential needs on a monthly basis. Banks have different ways to gauge this, but once they determine that the monthly repayment of the loan you are applying for will not harm your finances, your application will receive the green light.

2. Loan-To-Value Ratio (LTV)

   LTV is a lending risk assessment ratio examined by banks before approving a home loan application. Assessments that result in high LTV ratios are usually considered as high risk. This is because there is a probability that if the loan is approved, it may cost the bank more.

   In Malaysia, home buyers can normally expect 90% LTV ratio for a housing loan. In November 2010, however, Bank Negara Malaysia issued a policy regulating the LTV ratio for housing loans. Under this policy, the maximum ratio is capped at 70% for borrowers purchasing their third home. The rule does not apply for first and second homes.

3. Credit Rating

   Credit rate shows your credibility in managing your finances and gives the bank a clue of how responsible you are in your financial obligations.

   Your credit score is analysed based on your payment history, length of credit history, new accounts, outstanding debt and types of credit used.

How does your monthly income affect your application?

Apart from your income, your chosen bank might also consider your bonuses and incentives such as your annuity income, commission and packaged salaries. These factors can increase your borrowing power and enable you to get attractive offers from the banks.

Here is a list of the common types of employment:

1. Permanent Employment

   If your employer has made you a permanent employee, it means that your position is secure. When a bank sees your permanent employment status, it shows that you have passed the probationary period and you are proven to be valuable to your company, which also makes your income reliable.

2. Probationary Period

   Although most probationary periods are typically three to six months, it can be longer. The bank wants to ensure that you’re not under a probationary period, because an employer can terminate your employment without any cause while you’re under the probationary period.

3. Contract Workers

   There are different types of contract employment and banks usually treat each type differently as well. They include subcontractors, company contractors and freelancers.

   Banks often view these workers as high risk due to the relatively risky employment arrangement. If you fall under the contract employment category, chances are that banks will require you to show not just proof of your income but also your future employment stability when you apply for a loan.

4. Self-Employed

   You need to be in the same employment position for at least two years prior to applying if you are a self-employed applicant. Banks will be using your previous tax returns to assess your ability to service your repayment. Any drastic decreases in your income over the previous years will be closely monitored by the bank.

5. Casual Employees

   Stability of income may become a concern to the bank if you are a casual employee. Banks also tend to think that when companies decide to lay off staff, casual employees are always the first to go. A consistent track record in your company or the industry that you have been working in would be a good proof to get your home loan approved.

6. Temporary Workers Or Agency Workers

   Hired on a temporary basis, temp or agency workers are employed through an intermediary body such as a recruitment agency. They will not be paid by the employer directly, instead, the agency that hired them will be the one to issue a salary.

   Agency workers will find it difficult to get their loan application approved. Those who are working in high-demand industries may find it easier to have their loans approved. For others, they would have to provide documents that would show ongoing employment.

In Conclusion

When it comes to getting approved for a home loan, proving that you currently have a job or other source of income is only the first step. You would also need to meet certain requirements pertaining to your employment history. However, as long as you meet the minimum conditions for the type of home loan you’re applying for, banks will be able to give you some consideration on approving it.

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.