1) Valuations
A valuation is what a bank / professional valuer feels is a fair price for a property. This step is especially important for pre-owned houses from the secondary / sub-sale market, and less important for purchases direct from developers.
Valuations determine the upper limit of your home loan. E.g. If you purchased a house for RM400,000 but the bank valuation is only RM350,000, the mortgage loan will be based on the lower of the two. You must be able to top up the difference between the loan amount and the purchase price in cash.
It is not uncommon for valuations to lag behind asking prices. And different banks may produce different valuations for the same property. If necessary, do not be afraid of looking for a valuations from another bank.
2) Debt Servicing Ratio
There is a saying, “Any amount beyond the repayment capacity of a customer is too much credit”. Regardless of the valuations for your house, the main credit decision-making criteria is your ability to repay.
This is determined by your Debt Servicing Ratio (DSR), which shows how much of your income is used to pay debt installments. It is calculated in by dividing the total monthly commitment over the total monthly income.
DSR = Commitment / Income * 100%
While not always true, a rule of thumb employed by many is that your total debt repayments should not exceed 70% of your net income.
3) Supporting Income Documents
For any income you have, you are expected to provide the relevant supporting documents to the bank. These include matching pay slips, bank account statements EPF statements, income tax statements, audited accounts etc.
It is important that there must be at least a 3-6 month of paper trail records for the income. This indicates to the bank that the source of income you have is a stable one.
4) Existing Liabilities
Some borrowers feel that hiding or obfuscating their existing debt commitments would increase their chances of getting a housing loan. This is futile. Banks have visibility of all your existing liabilities with other banks via CCRIS, which is maintained by Bank Negara.
By being honest with bankers / consultants, they are better able to advise you up front on your chances of success so as to better save your time.
5) Credit History
There is a misconception that if a person has no liabilities at all, they are seen as more creditworthy. This is because intuitively, the lesser liabilities you have, the better your financial health.
But the irony of this is that it is detrimental to not have any liabilities at all simply because banks are wary of lending large amounts to individuals with no credit history. The risk is they cannot gauge your past repayment pattern.
If you do not currently have any liabilities, make it a point to build up your credit history. It is good practice to have at least 1 other liability (E.g. credit card) to which you which you make prompt payments before applying for a home loan.
Conclusion
When applying for a home loan, it helps to know what banks are looking for. Take advantage of the Home Loan Comparison tool and application service offered by us here at Loanstreet and let us help you get the best possible outcome.
