So you’re thinking of applying for a mortgage loan to make the biggest purchase of your life. But at some point, you are afraid of rejection. Well, who doesn’t?
Being rejected by a bank can be daunting and frustrating. It is common for banks to avoid high-risk borrowers since it won’t do them good in case you default on your loan. Everyone has a different risk profile and some may be riskier than others.
But what exactly makes you appear risky to the banks? How do you know if you are a high-risk borrower? Here are a few attributes that banks will look out for.
The first thing banks are going to look at is your credit report to assess your creditworthiness. Your creditworthiness is important to banks when determining whether your application should be accepted or declined.
Your credit history will show them how you manage your debt repayment. If you have missed a payment or paid less than required, which leads to a poor credit score, the banks will classify you as a high-risk borrower. Bad credit history can be a good reason for the banks to reject your loan application. Banks can obtain your details via the Central Credit Reference Information System (CCRIS) under the Credit Bureau of Bank Negara Malaysia or through CTOS Data System, a private credit reporting agency. While having a poor credit history can make you look risky, having no credit history at all can be just as bad.
Related article: How to get your first credit card without credit history
Most banks prefer salaried or self-employed workers with a good record of steady income. When getting your first loan, you should have a minimum of three to six months of employment history. Your loan may be automatically denied if you are unable to prove that you are gainfully employed.
People who work on a contract or those who are self-employed with no reliable income could belong in the high-risk borrower pool. If you’re working a commission-based job, you may also have trouble getting loans. Banks may be reluctant to lend you money if you don’t have a steady paycheck. You need to be convincing enough to repay the loan.
Banks are less likely to see you as risky if you have a steady income since you will appear more financially reliable in repaying your debt every month.
Conversely, banks will think that you can’t afford the loan repayment if you don’t make enough money. Thus, it makes your loan application more likely to be rejected. Some banks have set a wage requirement for the loan to be approved. If you don’t meet the requirement even just by a fraction, your application could still be rejected. In some cases, you could get a loan with a lower income but the interest rate might be slightly higher than usual.
You may have been working hard to maintain a decent credit score but your loan application will still be denied by the banks. This may be because you have a lot of other loan obligations.
Taking too much debt could cause your application to be rejected. Banks may refuse your application if your loan repayments are more than nearly 50% of your monthly income. This shows that you have a high debt to service ratio which affects your available cash flow to fund your monthly repayments.
The general rule made by Bank Negara is that the debt-to-income ratio should not be more than 60%. Most banks will be less likely to take the risk of lending you their money if your monthly repayments exceed 60% of your salary.
Bankruptcy will greatly affect your credit score no matter if you are going through it or have been through it. Those who have been declared bankrupt would not be able to take out any loans. On top of that, the record of bankruptcy will also be permanently available in CTOS for reference.
Even if you’re freed from it years later, your pre-bankruptcy history will make you look extremely risky to banks. Your bankruptcy status has adversely impacted your credit score which makes it harder for your loan to get approved.
So, do you think you appear risky to banks?
You are potentially a high-risk borrower if any of the above criteria apply to you. Banks typically won’t say why the application is denied. This is why identifying your risk level is important so that you won’t be surprised at the outcome later on. It’ll also help to increase the chances of getting your loan approved.
With some keen effort and discipline, it is possible to improve and build your credit score over time again.
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