6 Things Banks Look At In Your Mortgage Loan Application

Buying properties has always been a complicated process from finding the right property to filing numerous legal documents to financing the purchase. Yet, many overlook the importance of securing a suitable mortgage until it is too late, which has led to them losing their deposit.

Take a sneak peak of banks’ criterions of mortgage loans so you will be equipped with knowledge of how banks assess the eligibility of securing mortgages and better place your expectations.

1. Type of property

Firstly, it is important for buyers to be sure of the market they are looking at. Banks offer different loan packages for private and public housing.

If you are purchasing a HDB flat, you may also consider HDB Concessionary Loan with an LTV of up to 85% and a current 2.6% interest rate. On the other hand, banks usually have their interest rates pegged to variable indexes, which are more volatile than the fixed rate that HDB offers.

2. Number of properties already owned

If it is your first property, you get to enjoy a higher Loan to Value ratio (LTV), which would mean that you can borrow more money. Multiple factors affect LTV, including your age, number of properties owned and type of property you are purchasing.

If you own one or more properties, there will be a lower LTV offered, so you would have to finance the remainder with cash and/or CPF. Banks will generally be less willing to lend you more money given your increased financial commitments.

3. Financial Health

Aside from your income, banks also assess your financial health and consider your monthly commitments. This means that they will look at your credit card statements and existing loans to ensure that you are in good financial health, and not overleveraging on debt. If you have been paying off your loan installments on time, banks are likely to offer a higher LTV.

In order to evaluate your monthly commitments, banks use Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR) as an estimate. If you are purchasing a HDB flat, your monthly installments cannot exceed MSR of 30%. If you are buying a private property, TDSR sets that all your installments must be below 55%.

4. Age of borrower & mortgage loan tenure

Another key consideration for banks is the age of the borrower at maturity. If you are going to be 65 or older at the end of the loan tenure, banks are likely to offer lower LTV as there are higher risks involved — the possibility of retirement and defaulting is greater. With a lower mortgage offered, be prepared to fork out a higher down payment.

5. Number of borrowers

In the case of having a single borrower, only their age and income will be considered in home mortgage calculations.

If there is more than 1 borrower, the bank may choose to use Income Weighted Average Age (IWAA), where the age of individual borrowers is multiplied to their income and averaged. Hence, if the younger borrower earns more, the IWAA would be lower and vice versa. With a lower IWAA, the LTV would be higher and you would need to fork out less for your down payment.

So, if you are looking to buy a property, it may be more desirable to get your child as your co-borrower instead of your spouse or sibling.

6. Purpose of purchase

Last but not least, banks look at your motivation for purchasing the property. Better loan packages are offered for those who are buying houses for their own use, in comparison to those buying for capital investments.

To Conclude

Now that you are better equipped with the understanding of banks’ considerations at offering mortgage loans, you can ensure that you check the boxes before paying a deposit on any property.