All You Need To Know: The Income Requirements For Getting A Home Loan

You’ve spent the last few months talking to three different banks, and each time your hopes have sunk further. As you pick up today’s mail, you realise it’s probably your last chance of securing a home loan, before you lose out on that sweet new property you’ve had your eye on.

But the letter crushes you from the very first line: “We regret to inform you that…” and there’s no need to even read the rest. 

The question running through your head is probably why? 

You and your spouse have a great credit score, good incomes, and even an HDB flat you’re prepared to sell. What bizarre formula decides you don’t earn enough?

Chances are, the issue lies in one of these:

• Minimum income requirements
• Eligible income sources 
• Mortgage Servicing Ratio (for HDB properties)
• Total Debt Servicing Ratio (TDSR)
  

1. Minimum income requirements

Most lenders require a minimum income of $24,000 per annum, if you’re a sole borrower. If you have anyone co-signing the home loan with you, the minimum combined income requirements must be at least $36,000 per annum. 

2. Eligible income sources

Not all income sources are considered by the bank. One-off sources of income (e.g. you liquidated your stock portfolio, or got a huge 13- month bonus) are not considered for your various TDSR calculations (see below). 

Apart from a regular pay cheque, sources of income that may be accepted include:

• Income earned from commissions 
• Rental income from other properties (you usually have to be the owner of the property as well; do take note if the property is under the name of a different owner, such as your parents)
• Dividends, coupons, or any similar forms of income (acceptance varies significantly between lenders) 
• Income derived from owned businesses (some lenders will not consider income earned from certain smaller businesses, such as new companies with no track record)
  

Note that for sources of variable income, such as rental income or income from sales commissions, the bank will apply a 30 per cent haircut. 

For example, if you’re fully self-employed, and have a median income of about $10,000 per month, you would count as earning $7,000 per month for the purposes of TDSR calculations.

This makes loans harder to qualify for, if all the co-signers have variable income. In such cases, you may have to be ready to make a bigger down payment (see below). 

With regard to a monthly paycheck, note that your employer’s contribution does not count toward your assessed income. For example, if you earn $5,000 a month, your employer might typically contribute $850 to your CPF, on top of your usual contribution rate. 

In this case, your income counts as being $5,000, and not $5,850.

3. Mortgage Servicing Ratio (MSR)

The MSR applies to HDB properties, such as Exclusive Condominiums (ECs) that are yet to be fully privatised. 

The MSR restricts your home loan repayment to 30 per cent of your monthly income. So if you have an assessed income of $5,000 per month, your monthly loan repayment cannot exceed $1,500. 

Note that, for the purposes of calculating your monthly loan repayment, lenders will use a rate of 3.5 per cent, regardless of what the actual interest rate is.

For example:

Say you’re buying an EC, and your loan amount is $700,000 over 25 years. The actual interest rate is 1.4 per cent, so you would expect a monthly repayment of $2,766.

However, the bank will use an interest rate of 3.5 per cent, not 1.4 per cent, to assume your monthly repayment. This means your monthly repayment is assumed to be around $3,500, for the purposes of the MSR.

4. Total Debt Servicing Ratio (TDSR)

The TDSR applies to private properties, not HDB properties. For ECs, you need to meet both the MSR and TDSR.

The TDSR restricts your monthly home loan repayment – inclusive of all other debt obligations – to 60 per cent of your monthly income. 

For example, say you have a monthly income of $10,000 per month. Normally, this means your home loan repayment can be up to $6,000 a month and still be approved.

But say you also have outstanding personal loans*, for which you’re obliged to repay $1,200 per month. You also have a car loan, which costs around $1,700 per month. 

This would mean your monthly home loan repayment cannot exceed $3,100, as the TDSR also factors in the cost of those other loans. 

This is why it’s advisable to start paying down your debts aggressively before applying for a home loan (typically 12 months prior to the application, as it also helps your credit score.

Note that, as with the MSR, your monthly repayment is determined under an interest rate of 3.5 per cent.

*Personal loans and credit cards often let you repay a variable amount. For the purposes of calculating the TDSR, use the minimum required payment as your debt obligations.

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What if I can’t meet the MSR or TDSR?

There are only three solutions to this:

First, you could make a bigger down payment, thus reducing the monthly loan repayment.

Second, you could stretch out the loan tenure, which also reduces monthly loan repayments. But note that the maximum possible loan tenure is 35 years for private property. Also, going beyond 30 years, or having a loan that would last past the age of 65, will reduce the amount you can borrow for the house.

Third, you could rope in another co-signer for the loan, thus raising your collective income to meet the TDSR.

If you can’t do any of the above, then sorry, but you’ll need to find a less expensive property (or save up for a few more years, and then make a bigger down payment so you meet the TDSR).

(Take a closer look around the area, for alternative property options. You can also drop by Stacked to check out reviews of surrounding properties; there may be equally good options, for which you can meet the TDSR requirements).

You may be advised against taking the loan, even if you meet the TDSR limit

Sometimes your financial planner, property agent, or mortgage broker will advise against the loan, even if you meet the TDSR. 

This is related to financial prudence. A common consensus – among both real estate and personal finance professionals – is that your home loan should not raise your total monthly expenses beyond 30 to 40 per cent of your monthly income. The TDSR is the legal limit, not the advisable limit. 

From a real estate perspective, holding power – the ability to service your home and not be pressured to sell – is vital to property investment. 

If you’re spending 60 per cent of your monthly income just to stay afloat, then you may not have holding power in a financial crisis, such as retrenchment or lower income. So if you still want to take the plunge, make sure you’re extra careful in saving money afterward.

If you’re still having problems getting your home loan approved, give us a shout out on Facebook. 

If you’re still having issues despite meeting MSR and TDSR ratios, then the trouble may lie somewhere else; such as credit score, age limits, or even the nature of the property you’re buying. Get in touch with us, and we’ll put you in touch with the relevant experts.