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Are you likely to make the grade? Here are eight reasons you may - not be deemed loan-worthy

For anyone whose financial circumstances have turned nasty, downsizing his home seems like a sensible thing to do - yet it could create an even bigger nightmare.

That is what happened to Johnny (not his real name), whose wife lost her job a year ago after her employer relocated its factory out of Singapore.

Johnny found a buyer for their five-room HDB flat early this year, and soon after put $500 down for an option to buy a three-rommer.

‘He didn’t know he was not eligible for an HDB loan, and his property agent never advised him of the risks when he sold his flat,’ says Mr Dennis Ng, a spokesman for www.HousingLoanSG.com, a mortgage consultancy portal.

Johnny had gone to him for help with a bank mortgage application.

Every financial institution he applied to rejected his application after finding out that he had been late in paying his credit card debts, says Mr Ng. They did checks with the Credit Bureau, the body formed in 2002 to collate information on how credit-worthy consumers are.

Johnny lost his $500 option money as he could not complete the flat purchase. If it had been a private property, the cost would have been a more painful 1 per cent of the agreed purchase price.

Still, the consequences for Johnny were more severe than the lost option money. He had to complete the sale of his five-room flat and move out.

Mr Ng advised him to appeal to the HDB to grant him a loan, but does not know the outcome.

If Johnny had applied for in-principle approval for a bank loan before paying the option money, or even before he sold his five-roomer, he could have spared himself some agony.

Still, Mr Sazali Sarwan, a senior associate director of realty firm PropNex, says he has encountered cases where even after in-principle approval had been given, the loan failed to be granted later.

The reason: The bank learnt that the home buyer had just been sued for non-payment of some debt or, worse, for bankruptcy.

Something as seemingly innocuous as rolling over the debt on your credit cards can jeopardise your loan application.

‘Many people have the misconception that it’s alright to roll over their debt. To a bank, it is a strong sign that the consumer is a risk,’ says a banker who declined to be named.

Mr Ng says things can turn really nasty if the downgrader is unlucky enough to meet a real estate agent who persuades him to not just put down option money but also exercise the option to buy at the same time.

‘The agent says, ‘There’s another potential buyer who is also very interested in this flat. You have to exercise the option right away to make sure it’s yours.’ ‘

In such a case, the buyer of an HDB flat could suffer a loss of up to $5,000 as he would have to forfeit the money to the seller.

He could also get sued by the seller for failing to complete the buy transaction.

The irony is that he wanted to downgrade his home in order to obtain cash to pare down his debts, instead of living beyond his means.

A bad credit history is a prime reason for failed mortgage applications, but it is not the only one. Below are seven others and they are by no means exhaustive.

Says Mr Ng: ‘Many people are unaware of the danger of not getting a loan approved first before they commit to buying a property.’ Unstable income

AFTER 10 years in the navy, James (not his real name) decided to give up a regular, assured income to pursue his passion. He became a tennis coach and opened a sports shop.

When he applied for a mortgage, a bank rejected him because he did not have a track record of steady income as a self-employed person, says Ms Annie Lim, the managing director of Global Creatif Financial, a mortgage consultant.

Banks may also be stringent with other self-employed people in sales jobs, for example, she adds.

Your education level matters too. Combine a low education with only a short stint at your latest job and you become a prime candidate for bank rejection.

But it cannot get worse than being a contract worker. If you don’t have a permanent job, your chances of securing a mortgage are low, says Mr Sazali.

If you have a stable income, the bank’s loan limit could still render your application unsuccessful.

The bank will evaluate you on the basis of how much debt - including the intended mortgage repayment - you have compared with your income, or what is known as the debt-servicing ratio.

Different banks have different tolerance levels, and the maximum ratios allowed range from 30 per cent to 60 per cent, says Ms Lim.

Property type

IF YOU are buying a two-room HDB flat, you will have a hard time getting a mortgage.

As far as Mr Sazali knows, only Hong Leong Finance would consider giving you one. To other financial institutions, the loan amount is too small to be of interest.

Many banks require a minimum loan of $100,000, but a two-room flat costs only around $110,000, he says. So buyers either pay in full with cash and Central Provident Fund (CPF) savings, or switch to a bigger property.

It’s not easy get a ‘yes’ reply to your application to refinance your mortgage and ‘gear up’ - borrow more money on your property than what you currently owe the bank.

You cannot gear up for executive condominium units and HDB flats, but it is possible for private properties, subject to certain criteria, says the banker.

If you apply for a mortgage to buy an office or shop unit, do not bet on any success if you base your repayment plan on the use of your CPF savings.

Starting from this month, CPF savings cannot be used for the purchase of commercial properties.

Sometimes, it is not clear whether a bank views a property as being residential or commercial.

That is how you might find yourself receiving a letter of rejection for your mortgage application.

For example, you might be eyeing a unit on the second level of a shophouse, or a Soho (small office, home office) unit.

You apply for a big loan of, say, 90 per cent of the purchase price. Your application will be rejected if the bank considers the unit a commercial one, for which it grants a maximum loan of 70 or 80 per cent, says Mr Ng.

He knows someone who bought the second-floor unit of a conservation shophouse in Tan Quee Lan Street, off Beach Road.

Though he meant it for family accommodation, some banks he approached considered it commercial property.

It is not just the maximum loan quantum that is different but also the interest rates.

These are higher by one percentage point or more for commercial units, so you might bust the maximum monthly repayment a bank will allow based on your income.

‘Bad’ locationPROPERTIES in red-light districts cost relatively less but they can provide high rental yields.

However, do not count on getting a bank loan easily, or one with ‘normal’ rates.

As an article in this newspaper today says, you can expect to be turned away by many banks if your intended purchase is in Geylang or other red-light districts.

Fallen value

LET’S say you are among many people whose homes have fallen sharply in value since their purchase during the past 10 years.

Assume the value of your home has fallen to $500,000 now and your outstanding loan is also $500,000.

You are not happy with the higher mortgage interest rate that your bank is charging and you want to switch to another bank.

Be prepared for disappointment, as the new bank will say that the loan amount cannot exceed 80 per cent of the valuation, says Ms Lim.

Short leaseFANCY that old apartment in Chinatown?

Such properties go cheap as the remaining lease is relatively short, but banks worry that the property value will dwindle over time.

That is why your loan application might be rejected when you want a repayment period longer than what banks will agree to, says Mr Ng.

He cites the case of a businessman-investor who wanted a loan to buy a bungalow with only 41 years of lease left.

The man wanted to repay the mortgage over 20 years but the bank refused. The maximum it agreed to was 11 years.

Properties with a lease of less than 60 years come with another disadvantage: The CPF withdrawal limit - the maximum you can withdraw from your CPF savings to repay the loan - is far lower than for other properties.

Instead of 132 per cent of the purchase price or the valuation, whichever is lower, the limit can be as low as 42 per cent.

The exact figure depends on your age and the remaining lease of the property, says Mr Ng.

Under-declarationBE TRUTHFUL in whatever information the bank asks for in the mortgage form - or your application could be jeopardised, says Mr Bryan Ong, a senior associate manager of PropNex.

For example, if you own three properties, do not declare only one.

‘If you are not upfront with the bank, and it discovers something about you, it may not give you the loan,’ says Mr Ong.

Ms Lim agrees, saying that sometimes clients think they can get away with not revealing certain information - or worse, providing misleading information.

Multiple investmentsIF YOU have a few investment properties and are collecting rental on all of them, it might seem that you are in good shape.

But in assessing your debt-servicing ratio, as described earlier, many banks apply stringent criteria to assess how much they will lend you for the next property purchase.

Banks will not consider any rental income you declare unless the tenancy agreement is stamped - that is, stamp duty has been paid on it to make it a document recognised by the law, says Mr Ong.

And as little as 70 per cent of the rental income will be deemed yours by the banks as they know you have expenses such as income tax on the property, he says.

In addition, based on the tenancy agreement, the bank will consider only rental income that is assured for at least nine months more, based on the length of the outstanding tenancy, he adds. The criteria differ from bank to bank.

Source : Sunday Times - 30 Jul 2006