It must have been suck!
Perhaps, you are searching for your brand new personal residence. Or perhaps, you are hunting for your first investment property.
You did your research, drove around town, and months later … you have found a few units that you fancied upon. You made offers for each units. One of them got back to you at a favourable price. You signed the Letter of Offer, paid a visit to a few banks and had submitted a few of loan applications for the purchasing of your ideal property.
You waited with expectation of ‘Good News’ from these bankers.
But, a few weeks later, you received ‘Bad News’ after ‘Bad News’. These banks have brutally rejected your mortgage applications. Yikes… To some, it can be a demoralising experience. If that is you today, you may wonder: ‘Should I make another loan application with another bank or financial institution?’
If you are tempted to do so, please hold your horses. Take a moment or two to read on.
In most cases, there could be reasons to loan rejections and it is helpful for you to be aware of them first as it allows you to fix these issues before applying for your next financing facilities. Thus, in this article, I’ll share 5 key things that you need to know to improve your chances of getting approval for your next loan & financing application approved.
#1: How Banks Assess Your Loan Applications?
Different banks have different risk tolerance and hence, would adopt different credit policies. But, in general, banks would assess your loan application based on two principles: Conduct and Income.
Conduct is basically an assessment of a person’s loan repayment behaviour for a certain period of time, usually 6 – 12 months. In other words, before a banker lends you money, he wants to know how well you did in managing your current credit that had been previously extended to you. It is measured by calculating a credit score of an applicant before approving his loan application.
Income is simple. The more a person earns, the more he can afford to make his loan repayments. Hence, before a banker lends you money, he would calculate your existing Debt Service Ratio (DSR) to ascertain whether you are capable to take on additional credit.
Loan Assessment = Conduct (Credit Score) + Income (DSR)
#2: Do You Have a Good Credit Score?
Let us start with Conduct.
Before submitting your next loan application, do you know your present credit score today? If not, you may want to find out yours with this free tool:
Link: iMoney CreditScore
It is a useful and easy to use tool which includes a calculation of a 3-digit credit score that gauges your creditworthiness. The score ranges between 201 to 781 where a higher score indicates a stronger credit profile. Out of which, it can be further classified into 4 categories:
|Credit Profile||Credit Score|
661 – 781
581 – 660
461 – 580
201 – 460
If you have a credit score above 580, Congratulations! It indicates that you are a responsible borrower and banks view you as a good customer. Your chances of getting approvals for loans would be much higher.
If you have a credit score below 580, I think, it is best for you to focus on lifting your score to above 580 (at least Category 2) before submitting your next loan application.
#3: 5 Factors that Contribute to Your Credit Score
Source: iMoney CreditScore
If you use the free tool above, your score would appear on the left hand side of your report. On the right side, it tells you what you had done well and what are things which you need to act on to improve your credit score.
Here, I’ll share 5 key factors that would contribute to your credit score. From it, you might have an idea on the possible causes of a low credit score and what is needful to rectify it. These factors are:
Factor 1: Payment History (Weightage: 40%)
This is the most important of all 5 factors. It assesses whether you have been a good paymaster to your bankers. If you pay your loans on time without missing a single payment, you should score well in this category.
Factor 2: Credit Mix & Amounts Owed (Weightage: 30%)
Credit Mix refers to the types of loans that you have borrowed. For instance, a mortgage and a car loan are examples of secured credit as credit is ‘secured’ to a collateral. Personal loan and credit card debt are unsecured credit as they are money lended to you without a collateral. If you have ‘secured credits’ and had proven yourself to be a good paymaster, you should score well in this category.
Factor 3: Length of Credit History (Weightage: 10%)
Is it alright to be totally debt-free? Here, in this case, banks do not view it as a good thing. Why? This is because bankers could not assess your ‘behaviour’ as a creditor. Thus, it hurts your credit score.
Factor 4: New Credit Applications (Weightage: 10%)
It refers to the approval rate of your credit applications for the last 12 months. If your recent applications have been rejected continuously, then, it is best not to submit your next application. This is because you could be jeopardising your own credit score and thus, making your current situation worse off.
Factor 5: Legal Track Record (Weightage: 10%)
It refers to any legal action taken against you as a defendant.
#4: How to Improve Your Credit Score?
Here, I’ll provide you with a to-do-list to help you improve your credit score for the next 6 – 12 months:
- Have a Credit Card or two to Build Your Credit History.
- Pay Your Credit Card Bills in Full All of the Time.
- Keep Your Card Utilisation under 33% of Your Limit.
- Refrain from Making Too Many Loan Applications in a Single Year.
- Make Your Car Loan and Mortgage Payments On-Time.
- Pay Your Utility Bills and Traffic Summons
- Keep Track of Your Credit Score every 3 – 6 Months Once.
#5: How Much Can I Borrow?
I’ll cover a lot about Conduct. This is because it is a more crucial element that affects your loan approvals as compared to Income.
Once you have a credit score tabulated with iMoney CreditScore, you may just scroll down to find a loan product calculator as shown below. From it, you may select one of the four products (let’s use: Home Loan) and enter a figure which is your monthly income.
Source: iMoney CreditScore
Based on your monthly income and credit score, the system will calculate how much you could afford to pay in mortgage, the price of your property and your chances of getting approved as shown below.
Source: iMoney CreditScore
From which, you may proceed with the ‘Find a Home Loan Now’ button to do a bit of shopping for the best home loan deals in the market.
Now, if you are reading this and are interested to look for a credit card or a car loan, you may just click onto any loan product that you are interested to check out the latest and the best deals in the market today.
Conclusion: Towards a Society of Responsible Borrowers
Recently, iMoney CreditScore was launched to the public as a free credit health assessment tool to encourage responsible credit management practises among Malaysian borrowers. It is a joint effort by iMoney and RAM Credit Information (RAMCI) to combat issues pertaining to high household debts in our country.
As I write, the credit score tool is offered free of charge (FOC) for a limited time only. Thus, to get your credit score now: