Any home buyer can tell you that a home loan doesn’t come automatically—you need to apply carefully and fulfill certain eligibility conditions. However, what happens if your home loan application has been declined or rejected recently? You might be at a loss as to what to do now. We’ve compiled a list of potential reasons your home loan might get rejected in Singapore, and some steps you can take to try again.
Why Was Your Home Loan Application Rejected?
There are many reasons your home loan could get rejected in Singapore. When faced with such bad news, you may be wondering what to do next. Financial institutions such as banks typically do not state the reason for rejection, but our Home Finance Advisors will be able to advise you on your next steps as well, as how to apply more strategically the next time around.
The first step to overcoming this hurdle is to understand the reason your home loan application was declined or rejected.
Possible Reasons for a Rejected Home Loan in Singapore
1. High Total Debt Servicing Ratio (TDSR)
You may have heard of this term being thrown around, but if home ownership is a new journey for you, fret not. TDSR, simply put, refers to your income respective to your monthly debt repayments. These include existing bank loans, credit card payments, car payments and so on. In Singapore, if your TDSR exceeds 60% – your home loan will get rejected (or approved, but with the loan capped at the TDSR limits). There are several ways you can lower your TDSR to get your home loan approved.
Reduce your loan quantum
This is a common tactic to employ. By starting with a smaller loan your chance of approval is higher and when you settle your outstanding debts you may reapply for a bigger loan in the
Increase your loan tenure
By extending the duration of time it takes to pay your home loan off, it reduces your monthly loan repayments, giving you more leeway to adjust your TDSR accordingly. This could make all the difference between a 50% TDSR and one that exceeds 60%.
Pledge your liquid assets as collateral
If your debt to income ratio is high but you have invested in stocks or bank deposits, then providing financial statements can help you get out of a tricky situation. You may also choose to show funds to prove you’re in a good position to repay the mortgage.
Pick a more affordable home
If either way does not suit your situation, it might be time to start with a “starter home” first. This is what we call a home that is outside your choice perimeters but within your budget. Take this time to pay off your debts and you can eventually sell this home in favour of a better one in the future.
Do take note that even if you do all the above and meet the TDSR, your Home Finance Advisor might advise you against taking the home loan. Your home loan should ideally not exceed 40% of your monthly expenditure and thus might not be financially advisable to take on even though you meet the legal requirements to do so.
2. Poor Credit Score
Everyone has heard of a bad credit score, but no credit score is also a reason for alarm. If you have no reputation with paying back credit on time, banks may not be confident loaning to you as your ability to repay has not been measured. Preliminarily, you may check your credit score with Credit Bureau Singapore.
If your credit score is bad, you may wish to reapply next year. One year of regular repayment with your bank can help your home loan application in the future. If you are unable to clear your debt within a year, you might have to enlist the help of legal financial institutions. They could assist in getting your home loan approved at the cost of a higher interest rate.
Take a look at our earlier article for further information about how to improve your credit score.
3. You Have Variable Income
If you are in between jobs, self-employed or have undeclared income, this might be why your home loan could be rejected. The minimum income for a home loan in Singapore is $24,000 per annum if you’re a sole borrower. However, if you are using a combined income this is increased to $36,000. For variable incomes, the rules are more stringent.
Take the situation that you are a sole borrower who is fully self-employed. In this scenario, your business must have been around for at least two years, and you must show at least one year’s proof of income to verify your TDSR. However, even with verification, when you apply for your home loan, banks will only take into consideration 70% of your average monthly income as a basis for a loan application. This means that if you earn $5,000 a month, your mortgage offer will be based on an income estimate of only $3,500. If that self-employed income does not sufficiently contribute to the minimum, you may need to look at other sources of income as well.
These may include:
- Commissioned-based income
- Rental income from other properties (property that is owned by your parents or spouse does not count)
- Dividends, coupons and other investment-related income
- Income from owned businesses
4. The Loan Tenure Is Too Long
The maximum loan tenure for public property in Singapore is 25 years and private property is 30 years. For banks this is raised by five years respectively. However, assuming you want the highest LTV, the maximum age is capped at 65 years old for both.
This means if you are a 45-year-old applying for a home loan in Singapore your maximum tenure is reduced to 20 years regardless of the property you are purchasing. If you are unable to meet the TDSR under that requirement, your home loan will get rejected. In this case, it might be favourable for you to get a co-borrower to help ease the burden on your home loan. Do note, however, that the co-borrower must also be a co-owner.
Solutions to Prevent Home Loan Rejection
Getting the help of PropertyGuru’s Home Finance Advisors is an obvious way to let an experienced professional handle the ins and outs of home loans for you. Singapore has strict rules with regard to home loans and not all of them are immediately apparent to an ordinary Singaporean. Proper paperwork, choosing the right bank, landing yourself in the best possible borrowing scenario, and how to apply strategically for a good mortgage, are all things that our Home Finance Advisors can help with.
Imagine putting down the Option to Purchase without finalising your home loan, only to realise you have been rejected and have no idea why. These are common scenarios that people can find themselves in without proper research. Shake off the stress and let us help with your journey!
Disclaimer: Information provided on this website is general in nature and does not constitute financial advice.
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