Definition
Household Income
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The household income is the total combined income of home loan borrowers which would be the figure used by the lender during credit assessment and underwriting in general.
Also known as the gross monthly income, the term household income is probably most famous for describing the maximum income of households that cannot exceed the income ceiling to be eligible to purchase BTO flats from HDB.
But it also plays a critical role in applying for mortgages from the banks.
This is because household income is made up of personal income of borrowers. And less you have been living under a rock for the last decade, you’d know that the combined personal income of a couple would be better high than low in order to obtain a high loan quantum.
The final approved loan amount of a housing loan is calculated by:
- Deducting debt commitments from total income
- Taking remaining figure within the debt ratio as monthly installment
- And using that monthly installment amount against the loan tenure
- Ensuring the loan amount is within the loan-to-value
The above is of course, an overly simplified version of events during the loan approval process. But the gist is there.
Observing the information above, most home buyers should be able to see that there are basically 3 key factors in order to obtain approval for a high loan amount.
- Low debt obligations
- Long tenure
- High income
The LTV is something that a property buyer or homeowner has little control over.
The debt levels of individuals are often more or less certain and cannot be changed.
For example, a car loan would often be a debt of someone who drives to work. Even when the car loan is fully paid, the odds are that the borrower would take on a new loan for a new car… or else the transport allowance provided by their employers go to waste!
However, if you have a debt that would expire or mature within 3 to 6 month or less, then show the paperwork that proves this to the bank. You might just get that debt removed from the debt service ratio altogether.
The loan tenure is pretty much limited by the age of the applicants. This is especially so when they want to get as high a LTV as possible.
Personal income, or household income, is the variable that mortgage borrowers have the most control over.
Alternative source of income to boost household income
Most people think that the only source of household or personal income that can be used for consideration in loan assessment is salary.
That is not correct.
There are other sources of income that can be taken in as justified income. This can be useful when there is a need to boost your personal income, especially when you are self-employed and would have your income discounted during credit assessment.
Before we list down the items that can be accounted for as income, take note that some lenders might accept them and some might not. And they are generally not listed as required documents when you first apply for a housing loan.
Therefore, alternative documentation is required to verify them.
1) Allowances
Some companies provide housing allowance to employees, especially when they are foreigners who have came to Singapore to make a living.
These types of allowances are understandably very relevant to home loans and would be odd to find anyone who don’t see it this was as well.
Sometimes other types of allowances can be accepted by lenders as qualifying income as well.
For example, transport allowance.
2) Tenancy agreement
Rental income can absolutely be a part of qualifying income, especially with investment property.
If a property an investor is buying comes with inherited tenants, then the monthly mortgage payment would be paid for by the rents collected from tenants.
It sounds very logical indeed to accept rental income from tenancy agreements as part of personal income.
But again, whether they are accepted depends from lender to lender.
3) Dividends
Dividend payments, especially from blue chip stocks, are pretty regular and predictable.
They can sometimes be accepted as well.
4) Annuities
Annuities are regular payments received (usually from an insurer).
5) Alimony
Alimony is money that is not exactly classified as an income as one would not have worked for it.
But money coming in legally is as good as a salary when it comes to cash flow.
Providing the court documents of the alimony arrangement could be good enough to have it taken in as household income by the bank.
6) Payments from trusts
Trusts are legal instruments where assets and wealth are managed by a third party (usually a lawyer) to release assets such as money to beneficiaries when milestones are met.
If you are receiver of such trusts, then revealing them might boost your qualifying income.
Finally, remember that applying and getting approvals for home loans is a serious business. Lenders would make it their business to go after those who try to deceive them.
So don’t attempt to do anything illegal such as making false declaration or falsifying documents to increase household income.
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