Getting a home loan and navigating the homeownership journey as a freelancer in Singapore can be tricky. The process may seem to be geared more favourably toward salaried employees who earn a fixed income.
According to the Labour Force in Singapore Advance Release 2023, about 221,800 residents engaged in “own account work”, making up 12.2% of all employed residents in 2023.
If you’re one of the many freelancers or someone who intends to take up freelancing as a long-term occupation, here’s a quick guide on the criteria affecting your ability to take on and be approved for a mortgage loan in Singapore.
Table of contents:
- Factors affecting mortgage eligibility and the amount you can borrow
- Income
- Total Debt Servicing Ratio (TDSR)
- Credit score check
- CPF OA contributions
- Paperwork and tax returns
- As a freelancer buying an HDB flat, should you choose a bank or HDB loan?
1. Income
30% Haircut on All Variable Income
Banks apply the same ‘rules’ for salaried and self-employed people, in that all variable income will receive a 30% haircut. The difference is that for most salaried workers, only a small part of their income is variable, so it’s not as significant. For freelancers, your entire salary is likely variable.
Does Income Stability Matter?
Clearly, income is the first thing that any bank will take into consideration when anyone applies for a home loan. As someone looking at home loans for a self employed person, your first concern may be around income stability.
Your income stability matters to some extent. Banks are looking at your ability to service mortgage loans in Singapore on a monthly basis. However, to assess your income stability, they look at your latest IRAS Income Tax Notice of Assessment (NOA) over the last couple of years, depending on the bank’s criteria, rather than whether you earn the same amount every month.
Increase Your Income As Much As Possible Before Applying
In an ideal situation, you would want to increase your income as much as possible before you apply for a loan. That’s because how much you earn will affect your TDSR, which directly affects the amount you can borrow on your mortgage loan in Singapore.
Before you embark on the process, you want to ensure that you are in the best possible place to get a home loan as a self-employed person. If you have had a bad financial year, we suggest backing up your earnings records for at least two years before you apply.
2. TDSR
How Your TDSR Affects Your Mortgage Loan in Singapore
Say you earn a total of $5,000 a month on your freelancer income. Since this is considered variable income, you will have to take a 30% haircut; in other words, the bank will only consider 70% of your declared income as a basis for a loan offer.
This means the amount of money a bank will offer to loan you will be based on a $3,500 income, which significantly reduces how much you can borrow. And that’s why it’s also important to correctly declare your income!
As banks do not allow for your Total Debt Servicing Ratio (TDSR) to exceed 55% of your income, that means your monthly mortgage repayments cannot exceed $1,925 every month. This assumes you have no other financial commitments except your mortgage loan in Singapore.
Note: For those buying an HDB resale flat or an Executive Condo (EC) that has not been privatised, you’ll have to consider the Mortgage Servicing Ratio (MSR), too. A maximum of 30% of your gross monthly income can be used to service all property loans. If you’re a freelancer earning $5,000, that amount works out to $1,500.
3. Credit Score Check
When it comes to taking a bank loan, your credit score is an important gauge of your ability to repay the debt. Several factors affect your credit score, such as the number of credit applications, the amount of credit used, late payments, and the length of your credit history.
Before you apply for a loan, it’s a good idea to do a credit score check, as banks perform this check as part of the assessment. If you have a good credit score, you are more likely to be offered a loan with favourable terms, such as a lower interest rate.
Conversely, a low credit score could affect your loan terms or even result in a rejection of your application. Check out some tips to improve your credit score.
4. CPF OA Contributions
You may consider topping up your CPF OA before applying for a mortgage loan in Singapore.
You can use your CPF Ordinary Account (CPF OA) to foot the downpayment for your property, whether fully or partially. Additionally, you can use your CPF OA monies to pay your monthly home loan payments and conveyancing fees.
Having sufficient CPF OA funds would mean that you won’t have to worry as much about how to finance your property purchase. The only thing you have to take note of is how it may affect your CPF withdrawal limits.
Do note: Any amount used from your CPF OA account for the mortgage will need to be refunded back to CPF OA with accrued interest upon the sale of your property.
5. Paperwork and Tax Returns
You want to be diligent about declaring your income, tracking invoices and tax statements, and contributing to your Medisave and CPF OA accounts. The idea is to keep your accounts in order, and to have receipts to prove your income.
For those who are setting up a company or are freelancers, your business needs to be in existence for two years before the bank can recognise your self-employed income. Generally, you should ensure that your tax returns for the last two years provide a full picture of your ability to earn income for yourself.
Financing Your HDB Flat As A Freelancer: Bank Loan vs HDB Loan
If you’re a freelancer who is buying a private property, you can only finance your property with a bank loan. But what if you’re buying an HDB flat, what types of home loans for self employed persons should you look at? Should you go for a bank loan or an HDB loan?
For those purchasing an HDB flat, you would have to apply for the HDB Flat Eligibility (HFE) letter through the HDB Flat Portal. The HFE letter will inform you of your HDB flat eligibility, CPF Housing Grant eligibility and the amount you qualify for, and HDB loan eligibility and the amount you can loan.
Through the HDB Flat Portal, you can also request an In-Principle Approval (IPA) and Letter of Offer (LO) from participating Financial Institutions (FIs). Additionally, you can review potential loan options from said FIs. Here’s a quick guide on what the buying timeline would look like.
However, homebuyers with special circumstances, such as those who earn an irregular income, or those who receive dividends, may not receive the most thorough assessment when submitting their HFE application.
That’s because as compared to salaried workers, freelancers have unique financial situations due to their variable income. For instance, despite a freelancer’s variable income, their income is considered to be ‘fixed’ at the point of application. So, if you do earn more after submitting your HFE letter, you may not be able to secure better home loans for as a self employed person.
So what can you do? Speaking with a Mortgage Expert who is well-versed with the ins and outs of the home loan application process can provide critical, objective advice!
Choosing the Best Home Loans for Self Employed Freelancers
Generally, the eligibility criteria for freelancers are slightly different from salaried employees.
If you need further guidance, get in touch with our team of friendly and knowledgeable Mortgage Experts. They will be able to accurately advise you on the loan for your dream home, ensure that your finances are in good shape, and all your paperwork is in order before you embark on your home ownership journey. And the best part? It’s free!
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