There are various reasons why a housing loan application is turned down by a bank. In this article, we look at the ‘culprits’ responsible for this debacle, as well as the things that you can do to increase your odds of successfully getting a residential mortgage.
I. Central Bank
Many people pin the blame on the central bank or Bank Negara Malaysia (BNM) if their housing loan gets rejected. Many borrowers think they are the wrongdoer for their financing woes due to the central bank’s tough lending policies, which makes it harder to qualify for a loan from a lender.
But to answer if BNM should really be held accountable if your loan application gets axed, we should look at this from another perspective. If the central bank doesn’t implement stringent and prudent lending guidelines, Malaysia could suffer a subprime mortgage crisis, just like what occurred in the United States during the 2008 Global Financial Crisis.
How did the lending catastrophe happen in the US? It transpired when financial institutions focused more on chasing profits and began lending to anyone, including to those with bad credit scores, problematic debt payment history and even those with insufficient income to pay their housing loans.
Ultimately, a majority of these risky borrowers failed to repay their loans. This catapulted into a national economic issue due to the severe consequences it caused, such as massive defaults, enormous losses to banks, closures of lenders and contraction of home prices across the United States.
These are the things that Malaysia’s central bank is trying to prevent through the implementation of strict lending rules and regulations to home buyers. Such policies are necessary to safeguard our country. So, contemplate on this before pointing the finger at BNM.
II. Financial Institutions
If the central bank is not really the culprit, can we put the blame on financial institutions? After all, banks are the one who actually decides whether to reject or approve a loan application.
Again, before you place the blame on lenders, put yourself in their position. For instance, a relative wants to borrow RM100,000 from you. You know that the would-be borrower only has a monthly salary of RM7,500. Worse, he can’t save enough as he’s paying off so many other financial obligations, like credit cards and a car loan.
So will you still willingly lend him RM100,000 if you know that your relative is unlikely to be able to repay you? Most likely NO as the amount is no trivial sum. That’s your hard-earned money and there’s a high risk that he will default on his loan.
A bank is likely to arrive at the same decision. They’re not charitable organisations, instead they’re profit-generating companies that need to look out for the interest of their owners and stockholders.
Moreover, some banks have their own lending guidelines, in addition to the rules and regulations introduced by Bank Negara Malaysia. For instance, some have their own assessment criteria and scoring system which they use to determine whether a would-be borrower is eligible to receive a loan. As different lenders have varying lending policies, you must shop around to determine which financial institution is the most suitable one for you.
However, please take note that a bank will check your credit scores first before your other documents. So if your credit rating is not up to standard, lenders will most likely turn down your loan application.
III. Borrowers Themselves
Given that the credit rating is merely a reflection of one’s debt payment history and credit behaviour, most of the blame for getting your housing loan application rejected falls on you as the borrower.
This is the reason why you should pay back your financial obligations on time. And these are not just personal loans, credit cards, and car loans, but also your condo’s maintenance fees and sinking fund contributions as non-payment can ruin your credit scores with CTOS, and CCRIS run by the central bank’s Credit Bureau.
Defaulting on the above financial obligations will besmirch your records with CTOS and CCRIS, creating warning signs on your credit report and labelling you as a high-risk borrower who will most likely default on your housing loan as well. Consequently, banks would be hesitant to lend to you as non-payment of your loan would lead to losses on their part. This is why the blame for housing loan rejections mostly falls on the part of the borrower.
How to Increase the Chance of Getting Your Loan Approved?
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The silver lining of having your loan application rejected is that you can still apply. However, if you resubmit your mortgage application without setting your financial affairs in order, you’ll likely get the same results. So we listed some tips to increase your chances of being approved the next time you apply:
I. Improve Your Credit Score
BNM’s Central Credit Reference Information System (CCRIS) shows your credit activities for the past 12 months. Basically, it tells the financial institution whether you’ve paid your loans on time, or whether you paid them or not.
Given that your credit report is one of the most crucial criteria that banks look into before they decide whether you are a worthy customer, it’s a smart move to boost your credit score before re-applying for a housing loan. You can do this by making prompt payments on your credit cards, car loans, and other financial obligations.
In addition, please keep in mind that having a blank CCRIS report (i.e. you don’t have any loans) could jeopardise your loan application. This is because you don’t have a history of paying your debts, and financial institutions won’t know if you’re a good payer or not. Therefore, it’s good to have at least one debt through which you make timely payments.
Aside from your debt payments, the CCRIS report also shows your recent loan application rejections. So if you tried your luck with many different banks and all of them get axed, this could negatively impact your chance of successfully obtaining a loan when you re-apply. Thus, experts advise would-be borrowers to wait for three to six months before making another attempt.
II. Shop & Compare Banks’ Lending Criteria, Particularly DSR
You can improve your chance of securing a housing loan if you visit different banks and check their lending criteria, as some lenders have lenient lending policies, while others are more stringent.
For instance, various financial institutions have different guidelines on Debt Servicing Ratio (DSR), which measures if a borrower can still take on more loans. Basically, DSR = (Overall Monthly Debt Obligation ÷ Monthly Net Income) x 100.
For instance, Ali has an overall monthly debt obligation of RM1,000 and monthly net income of RM5,000, resulting in a DSR of 20 percent. Meanwhile, Emma has an overall monthly debt obligation of RM3,500 and monthly net income of RM5,000, leading to a DSR of 70 percent.
The lower your DSR, the higher your chance of obtaining a loan. Most of the time, banks only lend up to 70 percent of your DSR. However, take note that different banks have different internal rules on the maximum permissible DSR based on the client’s age, income level, net worth and whether the borrower is a professional or not. Please see the table below:
If the loan officer tells you that they can’t lend you because your DSR exceeds the bank’s threshold, you can easily fix this by slashing your existing debts, or repaying them entirely before making another attempt.
III. Ready Supporting Documents for Past Six Months or Older
Whether you’re a public servant, an employee in the private sector, self-employed, or a freelance worker, keeping organised files of your financial documents is important as lenders require them as proof of your earning power.
To make your next loan application more convenient, you should carefully store such documents for the most recent six months or older. These include:
• EA Form/Form BE/Form B: Pay our income taxes promptly and sort these records by year.
• Proof of income/Salary slip: Financial institutions will require you to submit proof of your income such as salary slips or bank statements. Therefore, neatly organise such records for the past six or twelve months, with not a single one missing.
• EPF Statements: If you’re a salaried employee, getting this document won’t be an issue as you and your employer are legally obliged to make monthly contributions to such. But if you’re a freelance worker, it’s advisable to make voluntary monthly contributions.
• Bank Account statements: Having a business or savings account with a consistently growing balance can make you appear as a responsible borrower, increasing your chance of obtaining a housing loan.
IV. Stay Updated on Government’s Announcements
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Read the news daily. The federal government and Bank Negara Malaysia sometimes announces policies that can either help you obtain a housing loan, or make it harder for you to get one. They also announce initiatives that help Malaysians purchase their own homes.
For instance, in March 2019, it was reported that the central bank instructed lenders to change unfair terms and conditions in their housing loan agreements, as well as use plain language that can be easily understood for both new and existing housing loan contracts by the end of 2019.
BNM is also preparing to release a set of standards that compels banks to act in good faith by:
• Ensuring fairness of terms in loan agreements
• Provision of clear and concise info on offered loan packages
• Offering suitable advice based on client’s needs and financial circumstances
• Exercising due care, skill and diligence when dealing with customers
If you want to improve your chances of obtaining a loan, it would help to get a copy of the new standards. This is why it pays to get updated with the latest news. But if you’re still struggling to secure a housing loan, here are some simple tips to help you get one:
• Only purchase things that are within your means
• Look for ways to increase your income
• Don’t spend a large part of your income on unneeded things
• Save at least 20 percent of your monthly income
• Don’t let your bank account balance fall to zero
Record your income and expenses each month to help you think of ways to improve your financial status.
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(Written by G. Zizan, 28th April 2020)
