Let’s set the situation: you found your dream home, you’ve gotten all your finances in order, and what’s more, your dream house is well within your budget! You fill up the necessary forms, hand them to the bank and then weeks later, you find out that your loan request has been rejected.
When that happens, the first thing you ask yourself is why. Why did the loan request get rejected? You’re left wondering, what went wrong?
In this article, firstly, we are going to explore the reasons why a loan may be rejected; and secondly, what you can do to prevent it from happening again.
First let’s take a look at:
Why did your loan get rejected?
1. You don’t have a steady job/income
Banks will look at whether an applicant has an unstable employment history or whether they have a stable source of income when they consider a loan application. The reason being that, to a bank, a stable job and/or a source of income, means you will be able to keep up with your monthly payments. If you have a tendency to change jobs every six months or you don’t receive a regular income, it raises red flags to a bank. This can be especially problematic for freelancers or self-employed individuals.
2. You might have applied to the wrong bank
Different banks have different requirements and criteria for the approval of a loan application. This is on top of sticking to rules set by Bank Negara Malaysia. This could be anything from their minimum age requirement and not having enough income, to the cost of the property itself.
3. You have too many loan commitments
If you already have a significant number of loan(s)/debts that you are yet to pay off, like student loans, car loans, credit card debt, or personal loans, then banks are unlikely to give you a housing loan. While different banks have different DSR caps, you should try to make sure that your DSR does not exceed 65%-70% of your net salary. If you really need a loan, then consider taking a longer tenure to reduce the amount you need to pay monthly.
4. Your credit score isn’t good
Banks tend to look at your CTOS and CCRIS reports, so that they can trace any late or overdue payments and your outstanding balance for the month. Through this, bank officials are able to evaluate your credit risk and gauge whether you are a reliable borrower and how likely it is that you will repay your loan. So, if your credit score is low, it decreases your chances of getting a home loan approved.
5. You don’t have any credit record
We found out what happens if your credit score is low, but what if you don’t have a credit record at all? Some of us don’t like to have a credit card or other financial commitments, due to the fear of overspending. While it is a good thing in its own way, it does not help you when you are applying for a home loan.
Why? Unfortunately, without past payment records, the bank won’t be able to determine whether you will pay back your dues on time. Banks look at people without a credit score as a poor credit risk!
The best way to solve this issue is to consider credit facilities such as credit cards, just so that you can start building your credit history. You can also consider using other financial facilities such as opening a savings or fixed deposit account, in order to increase the bank’s confidence in you.
6. You didn’t submit the right documents
When applying for a loan, it is vital that you submit the right documents with the right details. So make sure that the application is done properly, to avoid any unnecessary hassle.
Double check your application form and submit all the required documents to the bank’s representative.
Some of the documents you will need to submit include:
- A copy of your NRIC or Passport.
- Income documents such as salary payslips, salary crediting bank statements, commission statements, appointment letter, EA form and so on.
- A complete and accurate application form.
So what should you do next?
1. Look at your credit report and determine any pitfalls
Get your CCRIS and/or CTOS report and look through it with a fine toothcomb. Even if you happen to have a good credit core, there may be other factors that might skew your report, such as past loan rejections. This can be especially bad for those who tend to submit loan applications to multiple banks. It’s best if you wait about 3-6 months before applying for another loan.
You should also concentrate on clearing up any other debt you might have such as credit card debt or other loans you have under your name.
2. Ask the bank
The best way to solve a question is by asking it. If your loan application is rejected by a bank, you can ask them for the reason(s) why they rejected it. This way you will know what needs to be rectified and you can do better next time you apply for your loan.
3. Fix any minor errors
Sometimes banks will reject loan applications because of minor errors such as wrong information on a form, unclear copies of your NRIC or Passport, faulty or wrong signature and so on. If that is the case, take the simple steps to correct them.
4. Find a bank with a DSR that matches yours
One very common reason for banks to reject a loan approval is that the applicant’s DSR (Debt to Service ratio) is higher than the bank’s maximum allowable DSR. Every bank has its own guidelines for acceptable DSR. If your DSR is the problem, don’t worry, you can take steps to improve your DSR like, reducing your current debts or consolidating your unsecured loans and credit card bills.
5. Prepare at least 6 months’ worth of documentation
Whether you are a salaried employee, a freelancer or an entrepreneur, be scrupulous in your record keeping of financial information. This will be extremely helpful when the bank asks you for proof of financial capability.
It would be best for you to keep records of the last 6 months’ documentation of the following:
- EA Form/Form BE/Form B
- Salary slip/proof of income
- EPF statements
- Bank account statements
6. Stay updated on Bank Negara Malaysia’s latest borrowing regulations
Bank Negara Malaysia (BNM) has many borrowing regulations that all banks in Malaysia must follow. The most significant of BNM’s revisions happened in 2014. Do your own research and be sure to familiarise yourself with the necessary information on BNM’s rules of borrowing. It will be a big help when you apply for your loan.
Once you have all of your affairs in order, you are free to re-apply for your home loan. We recommend enlisting the help of a real estate agent or negotiator. They are trained professionals who have dedicated their careers into understanding the ins and outs of the real estate and the property market. They will be more than happy to help you with your home loan application and guide you through the entire process.
Want more advice on home loan applications? Talk to us, us a message at firstname.lastname@example.org or give us a call at 012-299-6155 or 037-450-6655.