2. Know Your Debt Service Ratio
Calculating your Debt Service Ratio (DSR) is what banks would do to determine whether or not you can afford the loan that you’re applying for.
A poor DSR is also one of the most common reasons for a bank to reject your loan application. Approximately 35% to 40% of loans get rejected due to bad DSR.
For a housing loan, this is used to estimate whether you can manage and repay your monthly instalments.
Banks use information such as your monthly net income, and any fixed debts you have to determine if the property you’re purchasing is within your financial means.
If the DSR result says that you’re going to have difficulty repaying your housing loan, they’re unlikely to approve your application.
2(A) How Does The Bank Calculate My Debt Service Ratio?
Here’s a simple equation to calculate your DSR:
Monthly commitments are things that you have to pay every month, such as credit card bills and other loans. Now, let’s say, you’re borrowing RM1,200 from a bank:
Total Monthly Net Income:
Gross Income (Basic salary + Fixed allowance): RM7,000
EPF Deduction: RM550
SOCSO Deduction: RM50
Tax Deduction: RM400
Net Income: RM6,000
Total Monthly Commitments:
Personal Loan: RM1,200
Car Loan: RM800
PTPTN Loan: RM200
Credit Card: RM300
Total Monthly Commitments: RM2,500
DSR (without new housing loan): (RM2,500/RM6,000) x 100% = 41.7%
DSR (with new housing loan of RM1,200): (RM3,700/RM6,000) x 100% = 61.7%
Have you noticed how your DSR increases when the new housing loan is included?
2(B) What Is The Ideal Range Of Debt Service Ratio?
The lower your DSR, the better.
The ideal range is between 30% to 40%. However, note that each bank has their own requirements depending on the individual applying for the loan, and they might also calculate DSR differently.
Some banks may allow a DSR as high as 80%, while some may only allow up to 50%. These limits also vary depending on your level of net income.
However, you should avoid having a high DSR at all times, as it indicates a heavy burden of debts and commitments in your account and it’ll drag you down when it comes to a loan application.
2(C) How Can I Improve My Debt Service Ratio?
If your DSR isn’t looking too good, you can improve it by reducing your debt, or by increasing your income.
Start by paying off the larger debts you owe, which can improve your score for a fair bit.
Consolidating your debt for unsecured loans like credit card bills and Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) can also make it easier for you to manage everything, and might even help you save on interest.
You should also find out how the bank you’re applying to calculates and assumes your monthly commitments.
If you’re paying less than what the bank estimates, you can submit proof of it and the bank will usually accept any declaration.
3. Make Sure Your Documentation Is Airtight
Imagine your housing loan application gets rejected, not because you have a bad DSR or poor repayment history - but because you didn’t complete the application properly.
Banks require paperwork from you when you apply for a loan. The basic list includes:
- A completed loan application form
- A clear copy of your NRIC
- A copy of the Sale and Purchase Agreement (SPA), booking form, or letter of receipt from the seller or developer
- A copy of the individual title (where required)
- Your income statement (3 to 6 months worth of payslips, salary crediting statements, etc.)
- Your EA form (a yearly Remuneration Statement that states your income for the previous year.)
- Your KWSP statement
- Your income tax statement
- Your deposit statement (Fixed Deposit, ASB or Bonds that shows details of your emergency finances)
Note that income documentation is one of the most common things that may cause an application to get denied.
Different banks have different requirements for income documentation and use different methods to derive your income from the documents submitted.
This means that the same document can result in a variance of up to 50% from bank to bank.
3(A) Fixed Versus Variable Income
If you earn a fixed income, the important thing you’d want to show the bank is that you contribute to the Employees Provident Fund (EPF) and pay taxes.
This information should be reflected within your payslips if they’re part of the documentation the bank requires.
If you have a variable or commission-based income, the bank will want to see income stability. You’ll need to provide the bank with several months of income documentation, usually over a 6-month period.
If you have some months where income is more volatile, you’ll want to provide even more documentation to prove that your income is stable enough for you to take up the housing loan.
If you’re on a commission scheme, inform your bank on whether it’s a quarterly, half-year, or yearly scheme.
3(B) If You’re A Business Owner
If you run your own business, you need to make sure all your paperwork is in order as improperly maintained business paperwork can get your loans rejected.
Typically, your business will need a running history of at least 2 years, possesses an audited profit and loss record, or any goods transaction which can be proved via bank statements.
Similar to individuals with variable or commission-based income, you’ll want to show the bank that your business and earnings are stable.
4. Have A Good Employment Record
If this is your first housing loan, you may need to have at least 3 to 6 months worth of employment history to get approved.
A job that provides EPF contribution is vital, even if the income is not high. Certain banks may not offer you a loan if you receive your salary via cash deposits.
Continuity of your employment and how long you’ve worked with an employer is an important factor in the approval process.
This means that just because you’ve got a new job that gives you a huge salary increment, it doesn’t mean you have a higher chance of getting your housing loan approved.
However, there are things that can help justify your case. For example, you can say that you’ve stepped up to a new job that pays you better.
It also helps if you provide the bank with documentation showing your employment confirmation letter, as well as your income history from your previous employment.
All in all, do remember that if you have a lot of rejected loan applications, it can put a dent in your creditworthiness, so think carefully before you send out a bunch of loan applications.