Why my housing loan application got rejected???

I believe there are more than a handful of people out there who have the same question on their mind when their housing loan applications got rejected by the banks. But how many actually know what goes on behind the scene in credit processing?

Besides the normal credit checks, banks have a standard procedure to calculate your Debt Servicing Ratio (DSR) to check if you meet their internal criteria. Based on my past experience, i have summarized the steps require to tabulate the DSR (may differ from bank to bank):

Scenario:

Client A (40 yrs old) would like to buy a freehold private property with indicative value of SGD 1,000,000. He is planning to take a loan from the bank for 20 years. He has a CPF lumpsum of SGD 350,000 sitting in the OA account after working for many year. He also have FD Savings of SGD 200,000 with a bank. He has a outstanding car loan where he pays a monthly installment of SGD 700, and a monthly installment of SGD 300 on his Credit Card. If he earns $4,500 gross employment income every month, will his loan application be approved (for 80% financing package)?

Step 1: Calculate Stamp Duty requirement

Stamp Duty Calculation:
1st $180,000 – 1%
2nd $180,000 – 2%
Subsequently – 3%

For property worth more than $360,000, you may use the following short cut formula:

Stamp Duty = Property value * 3% - 5,400

For Property Value @ 1,000,000

Stamp Duty
= 1,000,000 x 3% - 5,400
= 24,600

Step 2: Calculate Maximum Loan Amount (80% financing)

Private Property VL = $1,000,000
Maximum loan amount = $800,000

Step 3: Calculate Monthly installment for the loan after deducting CPF lumpsum

CPF lump sum available = $350,000
FD = $200,000
Stamp Duty = $26,400 (use CPF to offset)
Nett CPF available to use = $323,600
Loan Tenor required = 20 yrs

Income = $4,500 (Gross)
Car Loan = $700
Credit Card Monthly Installment = $300

Generic 80% loan package @
1 yr 3.50%
2 yr 3.75%
3 yr 3.98% (normally banks will take the largest to calculate)

Actual loan required
= $1,000,000 - $200,000 (FD) - $323,600 (CPF Lumpsum)
= $476,400 (less than 80% - ok )

For 20yr loan @ 3.98%, monthly installment:
Loan required (PV) = $476,400
Tenor (n) = 20 x 12
Interest (i) = 3.98/12

Compute montly installment (PMT) = $2881.87 (require amortization)

Step 4: Calculate DSR (most bank uses 40% as benchmark)

Total Current Liabilities = $2881.87 + 700 + 300 = $3881.87

Debt Servicing Ratio (DSR)
= Total Current Liaibilities / Total Gross Income
= 3881.87 / 4500 * 100%
= 86.26% > 40% (Loan will be rejected)

Options:
1) Get one Joint Applicant with income > $5204.68 (3887.87/40% - 4500)
2) Reduce loan amount
3) Increase loan tenor + joint applicant

Note: Most banks have age limitation on the applicant; they restrict the maximum age of applicant after the expiry of the loan to be at 65 years. In above scenario, Client A will be 60 years old after the loan expires, thus still within the age limit. Take note that legal fees not taken into account.