Buying a home is often a big purchase for which you’ll most likely need a sizeable loan, however, as comedian Bob Hope says, “a bank is a place that will lend you money if you can prove that you don't need it". While humorous this quote is more than just a joke, it essentially illustrates how banks respond to borrowers. Those who have means to repay a loan will have a better chance of securing one.
Thus, to give yourself the best prospects of receiving financing for your next property purchase, you’ll need to show your lenders the financial strength you possess. We’ve gathered and expanded on three effective tactics that are best started at least 12-months before attempting to secure financing.
Here’s what to do prior to applying for a home loan.
1. Raise a Strong Deposit
While it is technically possible to secure financing for a home with little or no deposit, the qualifying terms are quite stringent making it difficult to successfully get your loan. On the other hand, borrowers with deposits in hand will appear much more attractive to lenders.
Even if you do secure zero-deposit loans, you will often end up paying higher interests and find that your home purchase options might be limited in terms of price and location.
Thus, it’s best to improve your financing prospects by building a deposit of at least 5% to 10% (even better if it’s 20%) of your target purchase price.
Here are a few ways to fund your home loan deposit
- Employ “aggressive savings” tactics. Save directly from your paycheck by setting up an automatic deduction to be channeled into a separate savings account. You should also place all extra earnings (e.g. bonuses, commissions, etc.) in this dedicated account as well.
- Cut back on utilities and unnecessary subscriptions. By aiming for a cutback of at least RM100 per month (or 15% whichever is more), for a period of 12 to 18 months you can accumulate a minimum of RM1, 200 to add to your deposit fund.
- Borrow from family members. Consider asking for a ‘friendly-loan’ from more well-off relatives, but do have a repayment plan in place before asking for one. Or else you may ruin relationships and incur more debt than you can repay.
- Put your savings into a high-interest Fixed Deposit account. Doing this will help you safely build on your existing savings. It could also help improve your financing chances if you apply with the bank in which you have an FD.
- EPF withdrawal. You may choose to take out 10% of the home purchase price from your EPF Account II for 100% housing loans. Your EPF savings also provide you the option to pay off your loan sooner with special housing withdrawals for you and your spouse.
2. Improve Credit Score
Bank lenders depend heavily on credit scores (amongst others measures) when considering an applicant’s eligibility for home financing. Those without a strong credit history will find it rather difficult to obtain a home loan or any other type of loan for that matter.
Thus, it is crucial to strengthen your credit score before applying for financing. Working on your credit should begin at least 12 months in advance, so that any arrears you may need to clear up will not appear on record (for CCRIS).
The first step is to obtain a copy of your credit report; you can get in person, online or via correspondence from the Credit Bureau of Bank Negara Malaysia or through official credit reporting agencies such as RAMCI and CTOS.
Once you’ve obtained your report, check to see if the information is accurate, pay up any arrears, and settle disputes (if any); common ones are from unpaid phone bills and other utilities.
Other than ‘cleaning’ your prior credit, you can further improve your rating by applying for a credit card (if you don’t already have one or are otherwise holding not more than three) to show your access to funds. If you do swipe for purchases, be sure to stick to your limit and make timely repayments to indicate to potential lenders your responsible spending habits.
3. Get Your Support Documents Ready
As you apply for bank loans to finance your home purchase, you will need a host of documents to support your application.
But other than standard identification papers, bank statements and proof of income, having special support documents could improve your viability as a borrower, earn you better interest rates and sometimes even speed up loan processing.
In some cases, additional support might be necessary for loan approval, for instance when applying with special circumstances such as being a freelance worker, an aged borrower (even retirees) or of lower income.
Here are the support papers that you’ll need to strengthen your loan presentation
- Collateral Support. If you have fixed deposits, bonds, unit trusts, ASBs and insurance certificates, you can use it as a guarantee on your home loan.
- Other Sources of Income. If you do not have any type of fixed income, it’s important to highlight other ways in which you earn, such as; rental earnings, royalties and dividends. You should also provide proof of other income that may be tax-exempt (e.g. some overseas income).
- Proof of Outside Financing. If you have obtained special financing such as a friendly or company loan for your deposit or other payments, ensure that the contracts or approval letters are in place to certify the source of your funding.
Bonus Tip! To those who are self-employed or working freelance, you might want to consider registering your trade as a business to support your application. Having a company in operation for at least one to two years with tax documents as proof of your earnings could help your application significantly. In addition, do make self-contributions to your EPF account for at least one to two years prior to applying for a loan.
Now you know what to do to become financially pretty before applying for a home loan! But are you settled on the type of home you might want to buy? Try PropSocial’s powerful search feature to help you discover the perfect home! Or post your requirements here and let us help you find the right agent to assist you!
(Written by: Desiree Nair, 10th January 2017)
