It’s tougher to get your loan approved? How do banks decide whether or not to approve our loan application?
I always read with amusement when some writer for some major media writes and quotes someone that it’s impossible to get banks to approve the loan applications these days. Hopefully they realise that banks exist because they wanted to make profits. In order to make profits, they will keep lending and lending and lending. Unless of course, there’s something not so right about our loan application. Oh yeah, they love our money too!
For example, they will get us to put money into the bank and pays us a paltry interest for savings account. FD rates are only at 2 percent currently. After they pay us this amount, they will use our savings to lend to borrowers who will pay them 3 percent or higher for a home loan. That’s how they earn profits which could then be shared with their shareholders. If you like this model, then please buy banking stocks. As for reasons why have rejected our loan application, let’s look at just 3 reasons as below:
#1 – Honesty is the best policy. Are we being honest with ourselves? We earn RM5,000 net salary per month. If we use 40% of this amount for mortgage, we could afford to pay RM2,000 per month. This is generally enough for us to buy a home of around RM450,000. What happened though is that we will try and buy a MINIMUM RM450,000 home or a slightly more expensive one.
Now for the reality. After deducting some of our other commitments like an instalment plan for a new smartphone or even credit card balances, the home price we could actually afford is lower. This was why the bank did not approve our loan in the first place. It was NOT because the bank hates us or that they have suddenly stopped lending. We just did NOT qualify for that maximum loan we thought we could.
#2 – That property may just be overpriced. Banks do their own valuations before they decide the amount to lend. Especially these days. Just ask some of your valuer friends. Just because the developer’s price is RM450,000 does not mean the bank agrees to the price! They may think that the price should be RM350,000 instead? When they see the value as RM350,000 and they lend us 90 percent loan, then they are only going to lend us RM315,000. We were looking at RM450,000 x 90 percent and that’s RM405,000. This is a huge gap.
Maybe if we submitted a loan for 80% instead, then perhaps they will now approve it because the risk to the bank is now lowered.
#3 – Our credit rating is just negative. If we have skipped credit card payments or some other loan repayments, chances are our credit rating has been affected. This is usually a cause for concern for the banks. This is why even if our salary is high enough to support the monthly mortgage repayment, the banks will still worry when they have seen our credit history. By the way, if we have NO credit ratings, the bank will also not approve our loan. They do not know what’s our risk profile… Get a credit card, spend some amount and repay them promptly. This helps tremendously.
Make us great again, I meant our credit trustworthiness.
Stop complaining about the banks. Start getting our financial standing back in order. Start evaluating homes which are not at the borderline of our own affordability. Start to read kopiandproperty.my Haha. The banks needed to continue earning higher profits. Else, the stock price will remain stagnant or start dropping. Thus, they will continue to lend but they will continue to be very conservative so that they minimise their risks of suffering huge losses if the borrowers start defaulting when bad times come.
As some have suggested, the banks should shoulder more risks but I think the shareholders of these banks would prefer the lending decision to be safe than sorry. Happy applying for a loan yeah.
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