A bank scorecard is a tool used by mortgage lenders to evaluate the creditworthiness of potential borrowers. It is used to determine the likelihood that a borrower will default on their mortgage loan and to assign a risk rating to the borrower. The scorecard takes into account a variety of factors that are relevant to a borrower’s creditworthiness, including their credit history, debt-to-income ratio, and employment history.
One of the main components of a bank scorecard is the borrower’s credit score. A credit score is a numerical representation of a person’s creditworthiness, based on their credit history. It is calculated using information from the borrower’s credit reports, which detail their credit accounts, payment history, and outstanding balances. Credit scores range from 300 to 850, with higher scores indicating a lower risk of default. Lenders typically prefer borrowers with credit scores of at least 620, although some may require a higher score. (Each bank’s grading process is different)
In addition to the borrower’s credit score, the scorecard also considers other factors related to their credit history. These may include the length of their credit history, the types of credit accounts they have, and the number of credit inquiries they have made in the past. Lenders may also look at the borrower’s payment history, including any late payments or bankruptcies. (Applicant advise not to use above 50% of the credit card limit)
Another important factor that is considered in a bank scorecard is the borrower’s debt-to-income ratio or known as debt service ratio (DSR). This ratio compares the borrower’s monthly debt payments to their monthly income and is used to determine their ability to manage their debt. A higher debt-to-income ratio may indicate that a borrower is overextended and may be at a higher risk of defaulting on their mortgage loan. Lenders typically prefer borrowers with debt-to-income ratios of 60% or lower for My First Home Scheme, although some may consider higher ratios on a case-by-case basis.
In addition to credit history and debt-to-income ratio, the scorecard may also consider other factors such as the borrower’s employment history and income. A stable employment history and a higher income may indicate that a borrower is more likely to be able to make their mortgage payments on time. Those working in the hotel and airline industries have almost no chance of obtaining a mortgage during the Covid Pandemic.
The scorecard may also consider the value of the property being purchased and the borrower’s assets. Lenders may look at the value of the property (RUMAWIP is cap at max price of RM300,000) to determine whether it provides sufficient collateral for the loan. They may also consider the borrower’s assets, such as savings or investments, to determine their financial stability and ability to make their mortgage payments.
The purpose of the bank scorecard is to help lenders make informed decisions about whether to approve a mortgage loan and, if so, at what terms. Lenders use the scorecard to determine the interest rate and down payment requirements for the loan. Borrowers with higher scorecard ratings may be offered more favorable loan terms, such as a lower interest rate or a higher loan-to-value ratio (not applicable for RUMAWIP).
The scorecard is an important tool for both lenders and borrowers. Lenders use it to mitigate the risk of default, while borrowers can use it to understand what factors are most important to lenders and to take steps to improve their creditworthiness. Improving a borrower’s scorecard rating may make it easier to qualify for a mortgage loan and may result in more favorable loan terms.
There are several ways that borrowers can improve their scorecard rating and increase their chances of getting approved for a mortgage loan. One of the most important things they can do is pay their bills on time and reduce their outstanding balances (the lower the DSR; the better!). They can also work on building a longer credit history by opening new credit accounts and using them responsibly. Additionally, borrowers can try to lower their debt-to-income ratio by paying down their debt or increasing their income.