Getting home loan approval is an important activity for individuals who want to buy their dream home in Malaysia. However, there are several main reasons why a home loan application may be rejected by a bank or financial institution. Understanding these reasons can help prospective homebuyers take proactive steps to increase their chances of loan approval.
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1. Insufficient Financial Capacity
One of the main factors that banks consider when evaluating a home loan application is the ability to repay the loan and the applicant’s financial condition. This includes the individual’s monthly income, existing financial commitments and debt service ratio (DSR).
If the applicant’s income is deemed insufficient to cover the proposed loan amount or if their debt-to-income ratio exceeds the threshold acceptable to the bank, the loan application may be rejected. A lower DSR is considered better because of less commitment compared to income. It is important for applicants to carefully assess their financial situation and ensure that they have a healthy debt-to-income ratio before applying for a home loan.
2. Poor Credit History / Payment Record
A person’s credit history plays an important role in determining loan approval. Banks in Malaysia refer to credit reporting agencies such as Credit Bureau Malaysia (CTOS) and the Central Credit Reference Information System (CCRIS) to assess the creditworthiness of applicants. CTOS allows the Bank to assess whether the applicant is blacklisted by the Bank or other government or private agencies such as Telco companies, Indah water, motor shops and so on.
Meanwhile, CCRIS allows the Bank to see the applicant’s payment history in the last 12 months. A history of late payments, defaults or outstanding debts can significantly impact an individual’s credit score and lead to loan rejection. Therefore, to avoid this, prospective homebuyers should maintain a strong credit record by paying bills on time, settling outstanding debts and managing credit responsibly.
3. Insufficient documentation
Submitting accurate and complete documentation is important when applying for a home loan. Banks require various documents, such as proof of income, bank statements, proof of savings and identification documents, to verify the applicant’s financial stability and eligibility.
Failure to provide the required documents or provide incomplete or inaccurate information may result in loan rejection. To avoid this, applicants should gather and review all required documents carefully before submitting their home loan application.
4. Property Undervalued from Market Price
Banks conduct real estate appraisals to determine the market value of real estate for which they wish to obtain a loan. If the appraised value of the property is much lower than the requested loan amount, the bank will reject the loan application. This situation can arise if the property has unique features that are not adequately taken into account in the valuation or if market conditions have changed since the property valuation.
For example, modifications or extensions to the property cannot be approved by the authorities. To avoid this scenario, homebuyers should conduct their own research to ensure the proposed loan amount is in line with the property’s fair market value. Typically, approved renovations will fetch 10%-15% more value than the base property.
5. Unstable Job or Source of Income
A stable source of income is an important factor in loan approval. Banks usually favor applicants with regular employment and a reliable stream of income. Individuals with temporary (freelance) or contract-based jobs may face challenges in obtaining loan approval due to income instability.
Additionally, self-employed individuals may face difficulties if their income is irregular or difficult to verify. This situation is even more serious if the business involves a lot of cash transactions that cannot be confirmed by the bank. To improve their home loan approval prospects, applicants should aim for stable, long-term employment and provide proper documentation of their source of income.
In conclusion, a variety of factors can contribute to a bank’s decision to reject a home loan application. It is important for applicants to address these potential issues and work towards improving their financial standing before reapplying for a loan. Consulting with a financial advisor or mortgage broker can also provide valuable insights and assistance in navigating the loan application process.