However, this is not the FI’s business objective. If the housing loan is not a bankable case, the FI would rather not grant the financing than to take possession subsequently and sell the property to recover the exposure. Such drastic action would result in the FI gaining a poor reputation and also cause embarrassment to the property owner. Hence, the FIs will adopt the following process to evaluate the credit worthiness of each housing loan application as FIs are accountable to the relevant authority, shareholders and depositors for the loan exposure.

1)      Repayment Ability

When the housing loan application is received, the FIs will have to establish the loan applicants’ sources of income to repay the loan installments which comprise of principle and interest and all other financial liabilities taken prior to the housing loan application. The age of the applicants will determine the duration of loan tenure which will affect the amount of monthly installment, and the FIs will usually adopt the youngest applicant with qualified income to work out the longest loan tenure to keep the monthly installment affordable.

The type, nature and stability of employment of the loan applicants are very important in the approval assessment; as these are the major factors that affect repayment ability. Applicants must show proof of sustainable income to repay all loan obligations. Documentary evidences such as computerized pay slips, CPF 15 month Contribution History Statement for the employed and latest 2 years of Notice of Assessment from Inland Revenue Authority of Singapore for the self-employed are to be submitted for assessment. Other income such as rental can be used to substantiate provided they come with stamped tenancy agreement of no less than 9 months in remaining terms, some FIs may accept shorter remaining term but will take only a percentage of the rental as income.

There are FIs using more conservative approach of adopting a higher notional interest rate to assess applicants’ repayment ability as the current low interest rate may not last forever. Generally, the FIs are comfortable with debt servicing ratio (Debt over income ratio) from 35% to 50% depending on the employment status and earning ability of the loan applicants.

For HDB flat, it is required that all owners are to be loan applicants, but the private residential property may include additional loan applicant to reinforce the repayment ability.

2)       Banking/Credit Track Record

 

This is another crucial consideration in the loan approval. The FIs will rely on the search result of Credit Bureau Singapore which reflects past 12 months credit history of loan applicants.  In the said credit report, the FIs will have an over view of 12 month repayment cycle, existing and past credit applications and litigation suits.

 

Unless there is a good justification with documentary evidence to mitigate should there be any negative record in the report, the FIs would normally decline the loan application or approved a reduced loan amount.

 

Some FIs may a prefer loan applicant who has taken up credit card or unsecured overdraft or personal loan than one with totally no trace of any credit record. In the absence of credit track record, the FIs may ask for the active past 6 month bank statement where income is credited to observe how the income is managed.

 

In addition to the records in credit bureau report, some of the FIs may also look through the bank account for rejected/returned GIRO payments to phone or utilities bills due to insufficient fund to determine the repayment ability of the loan applicant.

 

3)      Type of Security

 

There are some properties the FIs may not accept as security for the housing loan, such as residential properties located in the red light districts or the remain lease of the property is less than 60 years, or if the property is in dilapidated condition unless it’s bought with the intention to rebuild.

 

There should be no change to the use of the property mortgaged to the FIs, but to strictly use for residential purpose. Use as boarding house is certainly prohibited too.

The above are just a glimpse of general credit approval consideration. The approval of each loan application depends on the merits of each case. It is always safer to obtain an in-principle approval from the FIs prior to any commitment to buying of any property.

At SingaporeHousingLoan.SG, we have a team of Housing Loan Specialists contactable at 6100SAVE(7238) to assist you in walking through the financial planning process of property ownership. Call them now at 6100SAVE(7283).