What Is Approval-in-Principle (AIP)?
Less than one-fifth of Singaporeans are “extremely familiar” with home loans, despite the country’s 90% homeownership rate.
Many homeowners confuse loan pre-approvals and pre-qualification. Confusing them could cost you thousands to six figures.
This article aims to dispel homeownership myths. We’ll discuss what an In-Principle Approval (IPA) is and why you should get one before buying a home. We’ll also compare pre-approvals with pre-qualifications. We’ll show how misunderstanding these distinctions can lead to costly mistakes.
Unlike Pre-Qualifications, Pre-Approvals
An Approval-in-Principle (AIP) is a lender’s agreement to lend you up to a certain amount and period if you desire. IPAs are similar to term sheets and MOUs in business.
Launching soon: Lentor Hills Residences, Tenet EC and The Reserve Residences. You need an IPA to help you budget for the bank loan amount. If you have a $600,000 IPA, you can buy a home up to $800,000 (based on a 75% loan-to-value restriction).
Normal IPAs are good for 30 days, therefore it may be premature to obtain one if you’re still “window shopping” for Lentor Hills Residences or the future Tenet EC. It’s okay to be a little ‘kiasu’ because banks will likely still approve your loan unless anything substantial has happened (loss of employment and/or income, bankruptcy, legal suits, etc.).
Obtaining an IPA involves three steps:
Favorite lender (s). First, choose one or two bank house loan choices.
IPA? If you apply to many lenders individually, the procedures may vary, making the process laborious. Most of these documents are similar to those needed for a conventional home loan application, such as income verification and CPF contributions. Previously, you had to produce credit card statements, but this need has been substantially abolished because the same information is in your Credit Bureau Report.
Wait patiently. Banks currently control it. If you pass, they’ll give you an IPA. You can buy a flat in Lentor Hills Residences or Tenet EC using an IPA.
Preapprovals and prequalifications explained
Pre-approvals are more committed than pre-qualifications. Pre-approvals aren’t binding. The bank can “back out” of the loan without legal ramifications if the property’s value drops. Pre-approval completes 90% of the home financing procedure.
The lender hasn’t committed in a pre-qualification. It’s a rough estimate of your loan-eligibility. The bank will “run the numbers” to estimate your income and financial commitments. Contrary to a pre-approval, no legal, bankruptcy, or credit checks are done at this stage.
Misunderstanding between the banks originates from how they work. Before pre-approval, some banks may pre-qualify. In such cases, you may be prequalified but not approved. Can happen:
Following a credit or legal check, the bank decides not to pre-approve (hence the importance of maintaining a good credit score).
They give you a pre-approval, but for less than you expected based on the pre-qualification.
Others may skip the pre-qualification phase. Prequalifications can easily be obtained via phone call or bank officer interaction. In contrast, pre-approvals always require official application forms and paperwork.
Due to variances between banks, you must always confirm with the lender whether you’ve gotten a pre-approval. Avoid skipping the IPA.
Skipping IPA Could Cost You a Lot
We warned that mistaking pre-qualification for pre-approval might cost tens of thousands of dollars. Due of the OTP charge, the same could happen if you skip the IPA.
The OTP charge is a “booking fee” that costs 1% of the property’s sale price. That’s $10,000 for a $1 million private home. If you pay the OTP charge but don’t qualify for the loan, you have no legal recourse to have the seller to return it to you (you’ll have to rely on their goodwill). For buildings under construction (BUC), the option cost is 5% and you can recover 75% if you cancel.
Even though this is the best reason to get an IPA, there are others. If you don’t have an IPA, these things may happen:
Your house hunt fails. An IPA is unnecessary early on. It’s hard to narrow down without knowing how much you can borrow.
With an IPA, agencies can prioritize other buyers. This may seem harsh, but an IPA pushes them closer to closure. Without an IPA, agents may do a lot of unpaid work.
It’s harder to bargain. Without an IPA, determining the maximum price for a property is harder. How can you bargain without it?
It takes longer to close. Even if you overcome the barriers and get your loan authorized, the process will be prolonged out for nothing.
There’s no reason not to get an IPA when you start your property search.