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Loan Approvals – What Standards Do Lenders Apply?
Not everyone have a general idea about how much they are eligible to loan from lenders for property purchases.
In Singapore for example, it’s either a maximum loan to value of 80%, 50%, or 30%.
But how much you are eligible for and how much you will be approved for are 2 different matters.
Usually what you see on the surface is just a submission of required documents and a wait for a few hours or days to obtain your loan approval or rejection.
There is a lot that goes on behind the scenes to assess your applications during the loan approval process.
Every lender will have their own internal criteria to assess your loan request. There are no standard guidelines to follow like a university textbook.
They will also have different systems and processes to streamline the huge volume of applications they receive each day.
One lender can also interpret data in a totally different manner compared to another.
There are however, some universal loan assessment guidelines and practices when it comes to mortgages and other credit facilities.
The lenders set the type of properties that they will finance.
This will be very specific so as not to disrupt the streamlined work flow.
Some lenders might not finance properties smaller than 500 square feet. Others might refuse to even look at properties with less than 30 year lease. Another will find it too risky to finance a building in an undesirable location on specific streets.
Some make it a point to stay away from property used for religious purposes.
So before you go ahead and make a property purchase, you might want to check with your lender if your property is one that meets their criteria.
A mortgage broker should be able to answer that question absolutely.
Loan to value ratio (LTV)
As previously mentioned, the authorities have now set maximum LTVs for buyers depending on their circumstances.
They now include criteria such as age, tenure of loan, whether it is the first property, TDSR, etc.
To calculate how much you can loan up to will require a valuation from a valuer.
During good times, valuers can get a little too bullish on property values and vice-versa.
This can affect your LTV.
You can challenge the valuers’ opinions if you find that they are not giving a fair value.
However, banks usually use their own valuers to value a property so as to avoid bias and misrepresentation.
The LTV is usually conservatively based on either the value of the property or the agreed purchase, whichever is lower.
On top of the property being mortgaged, lenders might also request that you put up more assets to make them more comfortable.
An example is a request to set up a fixed deposit account with a specific amount of funds. This gives them more peace of mind and a lesser risk to the loan.
Lenders will often reward your commitment with a lower interest rate as well.
In some cases, even when your personal income is unable to support the loan quantum you are asking for, you can still obtain the amount of funds you want want putting up a fixed deposit with the lender.
So if you get a loan offer that falls short of your required quantum, ask about the availability of this option.
Banks will often require you to sign a personal guarantee for the loan.
This means that if you defaults on the loan, the lender can go after your personal assets through litigation.
When you start going big time in property investments, you might find that personal guarantees are a lesser requirement.
Sources of funds
Lenders will be interested to know where these funds come from.
Their biggest fear is that your money comes from money laundering activities.
You are essentially using borrowed money to borrow more money. This is very risky.
The best source will undoubtedly be from your income stream from employment.
Having a lot of money in your personal accounts for a long time will make you look good.
If you are willing to put up a higher equity stake in the property, it will also work in your favor.
This is a critical factor as lenders want to know whether you personal income is able to service the mortgage repayments.
A debt servicing ratio is often used.
Depending on the lender, a 35% ratio to your monthly income may be used to stress test you ability to comfortably repay the mortgage installments.
When you are buying a tenanted property, the tenancy agreement can contribute to your income calculation.
It goes without saying that lenders will stay away from you when you have proven that you are a bad paymaster.
This can be judged from the payment history in your personal credit report.
If you have not been paying your credit bills regularly and promptly, you have only yourself to blame when your mortgage application gets rejected.
You can purchase your own credit record at the credit bureau.
It must be said that not all is lost when you have less than perfect credit.
Character and lifestyle
Like how insurers judge how risky taking your business is based on your work and lifestyle, lenders can also make risk judgements based on the information you provide.
A good example is being self-employed compared to being employed.
A self-employed individual has a bigger income risk than one that is employed as income can be unstable.
The smallest things can cause huge fluctuations to a self-employed individual’s income.
The criteria mentioned above are just guidelines that lenders may use to assess your mortgage loan applications.
There are surely more detailed assessment policies that they will apply.
Most lenders are flexible and wants to help you buy that dream home as long as you make them comfortable enough to lend you the money.
Your job as a borrower is to show them that you present very little risk to them.