By Gary Chua (Edited by PropertyGuru)
“Your mortgage application is rejected!”
The above phrase is quite frightening, but with a little financial planning, you will be able to get that mortgage loan.
The good old days where an officer judged and evaluated your loan application based on how they felt about you has gone.
Due to the fast-paced economic growth we are experiencing, the banking industry has become more competitive.
Therefore, banks have picked a systematic approach in processing mortgage / loan today.
This systematic approach has led to complex banking conditions, where the banks initiated policies and credit scoring system to decide if the bank would like you to be their mortgage customer, the amount of credit lines you deserve, as well as predicts the chances of you default the repayment.
Knowledge is the key and ensuring you have a flawless financial record will increase your chances greatly with banks.
This then translates into banks granting you more credit lines to leverage on your biggest investment.
However, as of today, approximately 50% of mortgage applications are rejected.
We are pretty sure that the majority of mortgage applicants today have the repayment capability and can afford the said property, but are still being rejected.
All this boils down to the fact that we need to be well-organized in managing our finances.
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Here are several reasons pertaining your loan rejection
1. Applying at the wrong bank
What? All banks don’t apply the same policies?
The answer is ‘No’. Each bank follows a different set of requirements. You may get your loans approved in one bank but may not get it in another.
The problem starts when you keep on applying in several banks at the same time, without realizing the consequences.
Did you know that Bank Negara Malaysia (BNM) tracks all our loan applications and their statuses?
If you started off wrongly by getting the first few banks to decline your application, the record sticks there and you may not get your future loans approved at the subsequent banks, even when you fit their requirements.
Come on, would you really lend money to someone who has records of rejected loans?
All banks have different risk appetites. You may get rejected for holding too many credit cards and you may also get rejected for not holding any credit card; both situations can occur based on the bank requirements.
Keeping your Central Credit Reference Information System (CCRIS) clean will ensure the banks favour you, as you will have the right profile which fits them well.
Some of the common "not preferred segments" are as follows:
- Not meeting the minimum age requirement
- Not in the right income band
- The bank does not offer financing on such property or at that particular location
There are several other reasons for the banks not to process your application up front, which includes the bank has already max-out their end financing line for that particular development or the bank does not prefer financing properties at that location.
Understanding these reasons are vital to prevent time wastage by submitting and applying at banks, which results in a higher possibility of rejection.
2. Low application score
Banks are getting more efficient and complex these days. Gone were the days where human judgement and manual eyeballing were done to accept or decline an application.
Most banks have implemented a scores engine called application score, which analyses the customer's profile - your age, where do you stay, education level, marital status and so on.
Ever wondered why the bank application form is lengthy with numerous questions about you?
Most of this information is collected and in each query, a score is given based on the details you provide.
Well, it is not as simple as giving a random score for each question, but scores based on a detailed algorithm combining the details.
3. Unfavourable Credit Score
Banks rely heavily on the credit score engine nowadays in decision-making. Credit score engine analyses your repayment behaviour based on your CCRIS.
Basically, a credit score denotes an indication on how wisely you manage your money in the past.
However, the policies and requirements differ from bank to bank, as each bank has its own risk appetite.
There are many ways to skin your CCRIS and some of the below may cause your loan to fail:
- No track record in CCRIS? (zero CCRIS is not necessarily good)
- Number of credit cards you have recently signed up for
- High frequency of borrowing in a short span of time (in the last 6 months)
- Credit card(s) showing high utilization (high spending)
- Credit card(s) with ‘over limit’ status
- Repayment pattern in the last 12 months
- Whether you are highly leveraged on unsecured loan(s) (personal loan)
Again, a clean CCRIS without loans are not necessarily something the bank prefers. You may be viewed as someone with a "thin bureau record".
On the other hand, having strings of facilities ("thick bureau") with a long list of outstanding balances might not necessarily be what a bank looks for either.
For a person with ‘thick bureau’, the bank will first consider your payment priority in the event of any misfortune. Managing your CCRIS well is important to prevent from having your loans rejected.
4. Denied due to Credit Rule
On top of credit scoring, banks may still reject your application with a set of credit rules – missed payment for more than 3 times in the last 6 months, missed your current monthly payment and so on.
Credit problems often stand in the way of a mortgage loan approval. Whilst some cases require extensive credit improvements, others can be resolved quickly.
Banks look at your past performance to gauge your future performance. Banks will also look at your leveraging level. If you had a poor repayment track record, chances are you will not get your loan approved.
Repayment trend can be easily obtained through CCRIS. Showing any delinquency of 2 months and above will greatly reduce your chance of getting that loan approved.
Matters become worse if you already have an existing loan in the bank you are currently applying for.
Your entire repayment behaviour will be reviewed, with your payment pattern. This will affect your current loan application – in a good or bad way.
5. Bad status in CCRIS
If you have any accounts which repayments were not made over a prolong period (normally more than 6 months for a personal loan or credit card, potentially longer for a secured loan), your record may be red flagged as a "special attention account" in your CCRIS.
Generally, banks will not proceed with your loan approval upon seeing any red flags, even though you have a good track record for your other credit facilities in your CCRIS.
If you approached the bank before the event of default or went into any legal battles with the bank, expressing your difficulties in meeting your monthly repayments, some banks may offer to restructure or reschedule your loans.
These usually are done by extending your tenure to lower down your monthly repayments.
Such acts are deemed as potential financial distress and despite you continue to make prompt repayments under these schemes; banks have a duty to report your facility as being restructured.
Other banks may not want to grant you any new mortgage facility because you will be perceived as not being able to manage your existing debts.
Other warning signs from your CCRIS are items such as enrolling yourself into AKPK (a debt management service under the arms of BNM), or legal actions taken against you previously.
Such remarks will not be erased from the system despite regularizing your payments for more than 12 months.
Maintaining discipline in your cheque facility is important. If you have 2 or more bounced cheques in the past 12 months, most banks will not proceed with your mortgage application.
The record will remain, regardless of the affected current account is closed or the account is not from the bank you are applying for the loan.
If you are officially declared a bankruptcy, you will not be able to get any new loans, refinance or top-up any mortgage facilities.
Bankruptcy status is published in the newspaper daily. If you have been declared bankrupt, either by a particular bank, individual or by an organization, your record will be available permanently in CTOS for reference.
CTOS captures and compiles bankruptcy status, which are published in the public sources. CCRIS only captures the bankruptcy status, if you are declared bankrupt by a bank.
8. Debt Service Ratio (DSR)
Knowing the ratio of your debt to income is important and key in getting your loan approved. This is a formula used by banks to evaluate your affordability level.
The DSR is calculated based on the total of all your monthly debt obligations - often called recurring debt / commitment, which includes:
- Total loan on mortgage
- Car loans
- Personal loans
- Minimum monthly payments on any credit card debts
- Other loans, together with the monthly commitment for the current application
All of that will be divided by the net income - after the deduction of income tax / KWSP/ SOSCO (where applicable).
This has become the most common rejection reason, where approximately 35% to 40% of loans are rejected due to this.
Different banks have a different DSR cut-off or capping (eg: 60%, 70%, or some even up to 80%). There are 2 key elements in improving your DSR ratio.
Firstly, having the bank recognizes your best and highest income is key as it ensures your DSR ratio gets lower.
Next, is to manage your monthly commitments / debts. There are several schools of thoughts in managing your debts. Here are some common ones:
- Sometimes, you just need to pay off some of your debts, if you have some fixed repayment debts which are close to the maturity of your facility, find a way to pay it off or consolidate them to other products with a longer repayment period.
- If you have secured loans, sometimes it's good to move them out of your CCRIS to free up and making you more DSR friendly.
- Find out how the bank you are applying for calculates and assume your monthly commitments. If you are currently paying at a lower amount, prove it and justify them. Banks normally would be able to accept it, if you're able prove it.
- Different banks have different DSR cut off, do find out and apply for those which favours you more.
9. Not submitting the ‘right’ income documents and other required documents
Sometimes, all it takes is a bad scanning or photocopy, and out goes your application. Before we discuss further on that, here are a basic list of paperwork required:
- Complete & accurate application form
- A clear copy of your NRIC
- A copy of the sales and purchase / booking form / letter of receipt from the seller or developer
- A copy of the individual title (where required)
- Income documents (eg: 3 to 6 month’s pay slips, salary crediting bank statements, EA form, tenancy agreement, commission statements, Borang B /BE and so on)
Income documentation is the most common area where an application may be declined.
Different banks have different income documentation requirements and will also have a different method of deriving income from the documents submitted.
This means that from the same document you have provided, banks may derive income with a variance of up to 50%.
This is often the case when you did not provide sufficient documentation or it is variable (fluctuates in nature).
Generally, for a fixed income earner, the key item to show here is that you contribute EPF and pay your taxes. This would be stated in your pay slips if that is the required income document.
For variable income earners / commission earners (which includes fixed income earners with a portion of the income contributed by allowances or incentives), the key here is to show income stability.
Banks will need sufficient months’ of income, typically over 6 month period. Where there is a high volatility in your income (in certain months), you should provide more documentation to justify your income stability.
Ensure your bank knows if you are on a quarter, half or yearly commission schemes, as you do not want to be viewed as an individual with very high variances in monthly earnings.
For business owners, improper maintenances of your business paperwork may lead you towards not getting any loans approved.
Typically you will need to have a business with at least 2 years in operation, on top of a good audited P&L or good transactions (proved in bank statements).
This is to demonstrate that the business has a stable income. Similar to a commission earner, proving income stability is vital.
You may need at least 3 to 6 months of employment history in order for you to obtain your very first loan.
Having a job that provides EPF contribution even though your income is not high is vital. Certain banks may not offer you a loan if your salary is paid by cash deposit.
Just landing on your next big job with a 50% increment in salary may not necessarily mean that you increase your chances of getting a mortgage loan.
Continuity of employment and how long have you worked with an employer is an important factor in getting that loan approved.
Other substantiations can also help justify if you are in this scenario. For example justifying that you are progressing to a new job in the same industry with a better remuneration helps.
Other documents to support your applications such as employment confirmation letter or previous employment income history may also help.
The pièce de résistance of maintaining a good financial track record
If you are deeply indebted or have too many credit problems, regardless of how many banks you might have tried, you might not succeed in obtaining a mortgage approval.
In this scenario, you will need to get your finances in order first. Especially, when you wanted to buy a new property.
All the above reasons that might cause your mortgage application decline can be mitigated or overcome.
There are many ways where you can start preparing and getting yourself accepted by the banks. So step up and grab the next big deal that comes to you.
'Good things come to those who wait. But better things come to those who work for it'. Start improving and get yourself prepared to be loan-able.
Get your money management right and be ready to own your dream property when the time comes!
This guide concludes the property buying process. To view the previous steps, you can visit the below:
Below are the other useful information you will need when purchasing a new home:
Gary has more than 11 years of banking experience, both in local and international banks. He turns his extensive knowledge and banking experience into his benefits and SMART financing that has given him an edge in his property investment journey. He contributes his views, comments and insights to property magazines & conventions. He is the CEO of SMART Financing where he shares his financial knowledge and experiences with his members and helps them master the skills on achieving financial freedom via responsible & smart leveraging.