Buying a home is most likely the biggest investment of your lifetime. However, given the size of this investment, most persons will need a home loan to make a home purchase. In this article, we will explore issues such as credit ratings and financial ratios, which are related to the process of obtaining a home loan.

How much you can afford to borrow depends on several factors, not just what a bank is willing to lend you. According to Investopedia, the general rule is that you can afford a mortgage that is 2x to 2.5x your gross income. Total monthly mortgage payments are typically made up of four components: principal, interest, taxes, and insurance. Your front-end ratio is the percentage of your annual gross income that goes toward paying your mortgage, and in general, it should not exceed 28%. Your back-end ratio is the percentage of your annual gross income that goes towards paying your debts, and in general, it should not exceed 36%.

Aside from income and the amount of a mortgage that you can afford, there is also a certain percentage that a financial institution is willing or able to lend in comparison with the appraised property value. This percentage is known as the loan-to-value ratio, where the mortgage amount is divided by the appraised property value. On 3rd November 2010, Bank Negara Malaysia implemented a maximum loan-to-value (LTV) ratio of 70%, which will be applicable to the third house financing facility taken out by a borrower. This measure aimed to support a stable and sustainable property market. However, this measure was removed for residential units priced from RM600,000 and above, which is applicable during the homeownership campaign, effective June 1, 2020, until May 31, 2021.

Aside from income, banks also evaluate prospective borrowers’ credit risk. Therefore, as a home buyer, it is important to improve your credit rating and reduce your credit risk. According to Investopedia, there are some strategies that can get you a better score. You should review your credit reports, settle your bill payments promptly, aim for a 30% credit utilisation or less, and limit your requests for new credit.

You can learn about your financial health on a credit risk perspective through CTOS at https://ctoscredit.com.my/. At CTOS, you can monitor your credit rating. Your CTOS Score is a 3-digit number that shows you how likely you are to be accepted for credit, such as credit cards, car loans, housing loans, and education loans. It is based on your past credit repayment behaviour and is used to predict how good you would be at repaying future credit. The score weightage for a CTOS score is as follows: payment history (45%), amounts owed (20%), credit history length (7%), credit mix (14%), and new credit (14%). Given the significant amount of focus that is placed on payment history and amounts owed, it is important to obtain a credit facility, settle your bill payments promptly, and aim for low utilisation of credit.

In conclusion, the journey of securing a home loan can be made easier by considering factors such as your existing financial commitments, affordability, and financial health. IJM Land wishes you success in securing your home loan as part of your stepping stone in owning your dream home!

Mak Academy principal Mak Kum Shi is a master English linguistics trainer with several years of experience in property journalism. Learn about English, Communications, and Real Estate by visiting https://makacademy.asia/