When a loan is meant to fulfill one’s dream, the commitment to see the loan through is strong.
Dreams unfulfilled. Opportunities foregone. Plans abandoned. These are not unusual stories, and the reasons are also common — not enough money, limited resources, and insufficient capital. That dream home, first car, or start-up business may forever be on the drawing board as it takes decades to save up for, and unplanned expenses or emergencies can arise and wipe out one’s savings.
The alternative to waiting is to get a loan, but for some, the fear of rejection can be paralyzing. Fear usually arises from uncertainty, that 50-50 probability because one does not know how to improve the odds.
The best way to reduce uncertainty and improve your probabilities is through information. Having good information gives you the power of clarity, which can help you make decisions more confidently.
Here’s a simple checklist that can help improve your chance of getting a “Yes” to your loan application:
Purpose of loan
Why do you need a loan? Banks prefer clients who are getting a loan for their personal use such as building a house that will become their residence or getting a new automobile to replace their worn-out family car. When a loan is meant to fulfill one’s dream, the commitment to see the loan through is strong.
Quality of collateral
This is particularly critical for housing loans as the bank needs to assess the value of the security. This is why the bank requests a copy of the TCT or CCT to determine the property’s technical boundaries, verify the legitimacy of ownership and check for any liens or encumbrances.
Applying for a bank loan actually protects the buyer of the property because the bank conducts the verification before the purchase is consummated. The appraised value (which differs from the selling price) of the collateral becomes the basis of the loanable amount.
Amount of equity
In our analysis, data consistently show that borrowers with higher paid-up equity are less likely to default.
For secondary market properties (i.e., acquired from a current owner), equity and downpayment are sometimes interchangeably used. The current owner would ask to be paid the full amount right away, preferably in cash, before transferring ownership of the property. Some owners are willing to accept a down payment first until the buyer is able to secure a bank loan and ownership is transferred upon release of the loan to the seller.
For properties that are pre-selling (i.e., purchased from a developer), these two terms vary. A reservation fee is first paid, followed by the required down payment after 30 days, then the monthly equity payments commence until project completion when a balloon payment equivalent to around 70 to 80 percent of the total unit cost is required prior to turnover. It can take two years to as long as four years for a development to be completed.
By the time the property is ready for turnover, one would have already paid 20 to 30 percent of the total contract price, appropriately referred to as one’s equity. The amount of equity is a major consideration for banks, as it is an indication of one’s stake and level of commitment to the required loan payments. The higher the equity, the higher the stake, the stronger the commitment.
Depending on whether you are buying a property in the secondary market or at the pre-selling stage, you should have enough savings to pay for the required down payment.
Stability of cashflow
Banks put a lot of weight on one’s source of income and its long-term stability, preferring predictability, and reliability of monthly cash flow. Banks request not just for one’s income tax return or financial statements but also payroll slips or certificates of employment for those employed, or bank statements and trade checks for those self-employed. These help determine a borrower’s cash flow reliability and their capability to pay the loan amortizations.
Capacity of income
Aside from the appraised value of the collateral, the loanable amount depends on the borrower’s capacity to service the monthly payments. To determine this, banks use the Gross Monthly Income Ratio (GMIR) or also referred to as Debt Service Ratio (DSR) computed as the amount of monthly amortization divided by the monthly income.
Studies have shown that GMIR or DSR should not exceed 30 to 50 percent, depending on the amount of monthly income and any other existing loan obligations. At today’s interest rate, a P1-million housing loan for 10 years will require a monthly amortization of about P11,000 to P12,000. Thus, if the required GMIR is 30 percent, the monthly income should be around P37,000.
To know how much the monthly amortization will be for a property you are eyeing, you can check out the BPI Family Housing Loan calculator at www.bpiloans.com. Once you find out the monthly amortization, simply divide this amount by the GMIR of 30 or 40 or 50 percent to get a sense of the required monthly income for you to afford your home. For those who are married and your spouse is also earning, the basis will be your combined or total household income. Should your personal or total household income be insufficient, consider these:
Find a more affordable property that will fit your budget.
Ask your loan account officer if you can qualify for a longer loan tenor, say 15 years.
Increase your equity in case you still have some extra savings.
Seek reinforcement from additional co-borrowers who have strong income sources, perhaps your parents, siblings, or relatives.
Handling of obligations
How disciplined have you been in managing your financial obligations? Credit scores are used in many countries as a basis for granting a loan. A major factor in these credit scores is one’s payment behavior as evidenced by the timeliness and consistency of payments on past and existing loans such as credit cards, personal loans, auto loans, and salary loans. In some countries, even data on payments to utility companies and government agencies are captured and considered in the credit score.
In the Philippines, banks, government agencies and telcos now contribute data to and access credit scores from the Credit Information Corporate (CIC), supervised by the Governance Commission for GOCCs.
Banner caption: Banks prefer clients who are getting a loan for their personal use.