zowhy.com- Buying a house is never easy, with all the considerations of the size, location, and of course the price. Moreover, once you finally find “the one”, you might have to apply for a housing loan if you do not have enough cash ready in your pocket, and it’s not a simple case either.
From what I learned during my placement in mortgage division, and also during my personal home loan application process, the bank usually decides to whether or not approve the application based on the applicant’s “5 Cs”. Check out the details below and find out how they would relate to you.
Character refers to whether or not the applicant would be responsible to meet his/her obligation of repaying the money they borrowed from the bank. To see if it would be safe to lend some (or big) money to you, they would check your credit history, based on SID checking. They would see if you pay your other loans on time or not. The legend is divided into 5 categories as follow:
1 = Billings paid on time or before due
2 = Billings paid 1-90 days after due
3 = Billings paid 91 – 120 days after due
4 = Billings paid 121 – 180 days after due
5 = Billings paid above 180 days after due (or yet to be paid)
The credit card statement usually looks like this:
Referring to the statement above, if you paid this billing on 8 December 2016 or in prior, then your status would be considered as collect 1. If you paid on 9 December 2016, or 17 February 2017, it would cause you a collect 2 status.
The bank would prefer the applicant whose collectability status of 1 in all his/her credit legend, which includes credit card, auto loan (for car/motorcycle), business loan, and personal loan. Some banks should be okay when they found an applicant having a history of status 2 in the past if it was already 1 year ago or longer, especially if there is only one case of such and the rest of the legend is clear. I myself forgot to pay one of my credit card charges that caused me having a collect 2 status on 1 particular month in my credit history, and the bank that I applied loan to did asked me to give them some additional documents of the billings and the receipt of such delayed payment as a covenant, but that’s it.
On the contrary, if you were found to be having the collectability status above 2, especially if it happens a lot, and some has not been solved until now, you shouldn’t be surprised if the lender rejected your application. I mean, who would be naive enough to lend some money to a person who is proven to have a habit of being careless in repaying the loan(s)? Not a bank, I suppose.
Capital refers to the asset that you own; for example cash, car, other property, or investment; because the bank would like to know if you would have personal valuables before asking them to commit any funding. Logically, if your saving balance is close to zero, and you possess no vehicle neither other property when you apply for the loan, then what are you going to use to pay for your down payment and other incurred fee?
The credit amount that would be approved is below the actual value of the collateral, and we call it as LTV (Loan to Value). Based on Bank Indonesia Regulation number 18/16/PBI/2016 that was just issued on August 2016, the allowed ceiling of a customer’s housing loan is 85%* from the house price. It means that if you bought a house worth of IDR 500million, the bank could lend you money, which you would pay back using installments, up to IDR 425million.
*for the first house. LTV for the second house is 80%, and 75% for the third house.
Remember, the LTV is not always used against the price tag that the seller or the property agent gives you, because the bank will decide the actual value based on the appraisal by an appointed third party. The appraisal team would come to the property location and conduct a survey to gather detailed information that includes:
If the actual size is aligned with what is stated in the documents (house certificate, building permit, and property tax card), and if the property is still in a good condition
How close it is to extra high-voltage wires, cemeteries, worship places, and factories
If the location is natural disaster (for example: flood, landslide) free
The price of the properties within the same area
Once the data is collected, the team would send a report to the bank that contains the findings and, most importantly, the valuation of the property. Based on the report, the bank would decide whether or not the application would be carried to the next process, or not.
For example, I found a case where an applicant would buy a house at the price of IDR 1billion. Unfortunately, the appraisal result came out reporting that the house is located inside an alley that only fits for 1 car, and the building condition is also aged; making the valuation dropped to IDR 750 million. Why is this an issue? Because she applied for loan amount of IDR 700 million (which is actually is only 70% from her agent’s offered price), but the collateral condition caused the eligible loan ceiling falling to IDR 600 million (the allowed maximum LTV was 80% back in 2012), which means that she had to cover the IDR 100 million spread by herself.
Thus, when you are looking for the perfect house, you should also pay attention to whether the property is bankable or not, and if the bank would value the property as high as your agent does.
However, the case above is only applied for secondary properties. For primary properties, which are the houses or apartments marketed by the developer, the partnering banks would already have the agreements with the developers, that the valuation of the property to be used in the application process would be the one stated on the price list. But still, you might want to sell the house or apartment someday, and when the day comes, you would want your asset to be bankable, otherwise you would have to wait for a customer who has enough money to pay you in cash.
Those were the 3 out of the 5 Cs in Credit Analysis; hopefully you have found it helpful so far. Check out my next post for the other 2 Cs that you would want to pay attention to before you apply for a housing loan.
Another key factor in the 5 C’s is conditions, which refer to the environment of an applicant that might affect her/his repaying capability. The bank would assess whether or not your position is already secure at your workplace, or if your business had a strong stability. That’s why most banks would require the applicant to be having a status of permanent employee who has worked for at least 1 or 2 years consecutively. The bank would verify the length of your work tenure with your reference letter, and also with the HR at your company. You’re doing your own business? Then the bank would check your legal documents to see how long your business has been running, and also make some phone calls with your distributors and clients.
The bank would also consider the possible issues, including economic factors, which could affect your business. For example, if you run a coal business and applied for housing loan at the time when the coal price has dropped globally for quite some time, forcing numbers of companies who run the same line of work stop their operations, then you would want to prepare the answer to the questions about how you would mitigate the risk just in case the condition gets worse. Even if your historical financial performance seems solid, the bank would still want to ensure that your business would not collapse or bankrupt during your loan tenor, because that would potentially bring a negative impact towards your capacity of paying the installments in the future.
Apart from financial condition, health would be a factor that could affect the probability of default. This is the reason why the bank would require the applicant to pay for life insurance, hence the sum insured would be able to cover the debts in case s/he passed away before settled. Some banks and the partner insurance companies would demand an applicant with certain conditions; usually a person who is above certain age, or who is applying for high amount loans; to have a medical check up to find if there is any health condition that would increase his/her risk like diabetes or heart issues. Should there be any findings, the bank would decide whether or not the applicant is rejected, or insured with higher premium to cover the risk.
Capacity measures your ability to repay the loan, by comparing your monthly income against the installment that you have to pay every month. The bank usually applies 33% ratio for employed applicants, and 50% for self-employed applicants. The counted income is net (after tax), but it takes your additional income into account, which means if you were paid 13 or 14 times a year (12 months salary + additional 1 or 2 times salary from holiday allowance), then it would be added to your income.
For example, if you were an employed applicant with monthly salary of IDR 10 million, here is how to calculate how much your maximum loan installment per month would be.
Net salary: IDR 10 million
Frequency: 14 times/year
Income counted: 14/12 x IDR 10 million = IDR 11.6 million
Max installment/month: 33% x IDR 11.6 million = IDR 3.8 million
Remember, the number is the total amount of maximum installment you are entitled to, which means if you already had any other loan in prior, it would cut the portion of your eligibility. You can have your spouse’s income to be counted into the calculation as well to increase the number, as long as you did not sign any prenuptial agreement.
Other point to remember, what you want to be considered as income has to have a valid proof. Say, you are claiming that you get monthly salary of IDR 10 million, then both your salary slip and your payroll account statement have to tally with this information.
How if you are a businessman, whose income is not precisely the same every month? First of all, what is considered as your income would be what the bank reviews as your net profit. For example, our analyst back then viewed that a restaurant could still generate up to 50% profit out of its revenue, which means if the turnover was IDR 100 million, the owner still keeps IDR 50 million for himself after paying for employees salary, taxes, and materials, which can be used to repay the loan.
Second of all, the bank would see how much you make on each month during a certain period, and some banks would decide your income based on the average of such, while the other might be conservative and take the lowest number as your income.
For example, if your business was reviewed as having a net profit margin of 10% and the turnover in your statement looks like this:
Sep ’16 IDR 100 million
Oct ’16 IDR 300 million
Nov ’16 IDR 50 million
Then, you would be entitled for monthly installment that is up to:
IDR (100+300+50) million/3 x 10% = IDR 15 million
Or, in some conservative bank, it would be:
IDR 50 million x 10% = IDR 5 million
That was the end of the article. I hope this article helped you to get an insight about the factors that influence the bank in giving a yes or a no or some requisites on your housing loan application.
Disclaimer: All the calculation method stated above was the one used during my placement at housing loan division. Different terms & conditions might apply at each bank.