In my earlier article, I explained how much cash you need on hand or in your CPF to buy a private property. However, simply having the down payment is not enough. You also need to have a certain income level to qualify for a home loan. In this article, I’ll provide some clarity on what banks or other lenders need to see, in terms of your earnings:
What forms of income count for your home loan application?
Your salary is the most obvious example, but it’s not the only one. Other forms of income can include:
- Rental income
- Self-employed income (e.g. income from being a Private Hire Vehicle driver, or from sales commissions)
- Income from stock dividends, bond coupons, and other investing instruments
- Income from royalties or patents
In general, you can cite something as income provided it’s not a one-off windfall (e.g., not bonuses and or a lottery win). In addition, you must be able to prove the income source; some banks will want to see your invoices, for example, if you say you run a business. Other times, simply having the income stated on your IRAS tax return will suffice.
The important thing to bear in mind is that all variable income is subject to a 30 per cent haircut.
For example, if you receive an average of $3,500 per month in sales commissions, lenders will count this as being only $2,450 per month, for the purposes of your loan application.
As such, purely self-employed home buyers must earn more on average to qualify for a home loan.
What amount of income do you need to qualify?
The main factor involved here is called the Total Debt Servicing Ratio (TDSR) framework.
This is a requirement imposed by the Monetary Authority of Singapore (MAS), so it’s applicable to all lenders; it doesn’t matter which bank you go to, they will all require you to meet the TDSR.
Under the TDSR, your monthly home loan repayment – inclusive of all your other debts – cannot exceed 60 per cent of your monthly income. For example:
Say you earn $8,000 per month, and have outstanding debts that require you to pay $1,000 per month.
You want to take a home loan for $1 million, for 30 years. The interest rate – for the purpose of calculating the TDSR – is always assumed to be 3.5 per cent*. This comes to a total monthly repayment of around $4,490 per month.
Usually you would qualify for this loan, as 60 per cent of $8,000 is $4,800.
However, you have other debt obligations of $1,000 a month. As such, your TDSR limit is lowered from $4,800 a month to $3,800 per month. You would thus fail to qualify for the home loan, as the monthly repayment is above $3,800.
*In reality, home loan rates will be closer to two per cent; but 3.5 per cent is always used during loan application, to ensure you can cope if the rate rises.
But what if you have a co-borrower for the loan?
If you have a co-borrower for the loan, then your combined incomes will apply. For example, say you and your spouse both co-sign the loan.
You have an income of $4,500 per month, while your spouse has an income of $3,500 per month. The TDSR limit is 60 per cent of ($4,500 + $3,500) = $8,000, or $4,800.
However, note that the debts of your co-borrower will also apply to the TDSR limit; so it’s not helpful to take on a co-borrower who is deeply in debt.
Also, if your co-borrower is self-employed or has variable income, do remember that the 30 per cent haircut will apply to them.
What can you do if you can’t meet the TDSR requirements?
Besides the obvious solution (raise your income, but don’t we all wish it were that easy?), these are some steps you can take:
- Pay down existing loans
- Make a higher down payment
- Stretch out the loan tenure if possible
- Put up some form of collateral
1. Pay down existing loans
As explained above, having other debts – such as credit card debt* or car loans – will add toward your TDSR limit. This is why I recommend actively paying down your debts, around 12 months before trying to get a home loan (it also improves your credit score).
Do consider taking some time to pay off your various debts first, and then re-applying for the loan later.
*For credit cards, personal loans, and other debts with variable repayment, the minimum required payment is used when determining your TDSR limit.
2. Make a higher down payment
Making a higher down payment will lower the monthly loan repayment. As such, it’s possible to overcome the low income barrier with a bigger cash outlay.
This scenario is quite common for older Singaporeans, who may have large cash reserves (or sales proceeds from their appreciated flat), but have limited income.
3. Stretch out the loan tenure if possible
The longer the loan tenure, the less the monthly repayment. However, this is not always possible: the maximum loan tenure for private properties is 35 years.
In addition, a loan tenure longer than 30 years, or which would last past your retirement age of 65, will require a much higher down payment *e.g. 55 per cent).
Do note that stretching the loan tenure will also mean paying more interest, in the long run.
4.Put up some form of collateral
The bank may still be able to grant the loan, if you have valuable collateral that you can pledge. For example, if you own physical gold, the bank may accept this as collateral, and approve your loan even if your income is technically too low.
What’s acceptable as collateral will vary between banks. Nearly all banks accept gold and silver, or a large cash deposit (made with the same bank). Some other banks may accept stock portfolios, bonds, or business assets.
In case I need to remind you, the bank can seize the collateral if you fail to service the loan; so do be careful what you put up for it.
If you’re having problems getting your home loan approved, talk to me and I can help.
Ron Chong is a leading property agent with Orange Tee & Tie, and had a previous background in construction and Interior Design. His background gives him a wider breadth of experience in dealing with Singapore properties, and he aims to provide practical, actionable advice to buyers and sellers today. Like him on Facebook for the latest news and updates.