To guard yourself and minimise the risk of ending up losing your option fee when buying a new property, it’s sensible to get an In-Principle Approval (IPA) for a home loan before making any formal offer. Having an IPA plays a key role in your home buying process and this article will explore why it is so.
An In-Principle Approval (IPA), sometimes also referred to as an Approval in Principle or AIP is essentially an agreement (verbal or via email) between a borrower and a lender bank. The bank assesses the borrower’s credit history and financial health to decide whether to approve their home loan application or not and for how much amount.
An IPA agreement typically includes two important details: (1) the loan amount and period for which the bank is willing to lend, and (2) the validity period of the IPA.
Please note that an IPA is not a guarantee of a mortgage and requesting an IPA does not mean that you are committing to take up a loan with that bank; rather it is a formal assurance that the bank will provide the specified home loan if you purchase a property within a certain period.
It requires the submission of official application forms and other information from your end, which are then verified by the bank during the assessment process.
Many times, home buyers rush into the decision of buying a house only to realise later that they can’t actually afford the property. As a result, they end up forfeiting their option fees.
Getting an In-Principle Approval doesn’t just protect you against the risk of losing your option fee; it also allows you to understand what you can afford so that you are able to budget your upcoming property purchase.
For instance, if you have $400,000 in cash and CPF and that you are getting an IPA of $800,000, then you know that you can afford to buy a home within a budget of $1.2 million.
Getting an IPA can take you a step closer to your dream home, which is why every potential homeowner should start their property purchase with an IPA application.
An IPA helps to figure out what you can and cannot afford. How? Well, let’s dig a little deep into the various benefits of getting an IPA in order to understand just how useful it really is.
When planning to buy a property, the first thing you should do is to figure out how much loan can you get from the bank. It is easier and quicker to find your ‘ideal’ home that fits your liking and budget when you already know what you can afford.
An IPA thus helps you by giving a clear idea of how much a bank is willing to loan you and how much money you need to arrange further.
Most homebuyers don’t back out of a property purchase because they are indecisive or confused in their minds; it is typically because they fail to understand that they can’t afford the property in the first place.
Since having an IPA helps you gain a better understanding of your finances, there are less chances of you forfeiting your deposit assuming you paid your option fee.
An IPA makes you look like a confident homebuyer who has sorted out their financing, which reduces the bank’s risk. That is why banks tend to offer promotional home loan rates for potential homebuyers who have already secured an IPA and subsequently an Option To Purchase (OTP).
Many property agents prioritise homebuyers with an IPA over those who are still to get one for their loan. An IPA signals some level of genuineness on the part of the potential buyer, which significantly decreases the risk of them doing a whole lot of work for free.
Borrowers without an IPA might not get the best service from agents as they might doubt their ability to pay for their desired property – sad but true!
The property market has numerous options and you can easily get confused. With an IPA, you get to exactly know the loan amount the bank is offering, which makes your house-hunting journey less time-consuming and much smoother.
So now you can view and easily shortlist properties that fit within the offered limit, saving you both time and effort during the home-buying process.
Without an IPA, it gets tricky to showcase absolute confidence when bargaining with sellers. When you are not certain of the maximum amount you will be able to pay for a property, how can you effectively negotiate around it?
In fact, potential buyers who bargain prices are taken more seriously by sellers vis-à-vis other buyers.
Getting an IPA gives you a better gauge of your finances, so you are able to define your budget and effectively work out how much would you be able to pay through monthly repayments throughout your home loan.
Although an IPA is not a necessary step in the home-buying process, getting one is a recommended thing as it goes a long way in financial planning, decision-making, and making the overall home loan process easier and less time-consuming. Once you get an IPA, you can go house shopping with a clear idea of what’s affordable.
Note that IPA is not a legally binding agreement. The loan is bound by the value of the property you plan to buy and the bank can technically renege without being subject to legal consequences. However, in practice, getting an IPA is almost a guarantee that you will get your home loan within the validity period.
Whether or not you should get an IPA depends on which stage you are at in your house buying endeavour. If you have just started and you are in the early stages of the house-shopping process, then an IPA might not be required considering that it comes with a period of validity.
So, if you are unable to secure an Option to Purchase (OTP) during that time, your IPA becomes invalid and the whole process has to be repeated.
When you are just starting the house-shopping process, it is better to opt for a loan eligibility evaluation from your preferred bank or professional mortgage advisory firms. This evaluation can be done within 10 minutes without the submission of any documents.
Therefore, whether or not you need an IPA actually depends on the stage of house shopping the individual is at. If you are serious about your property search, you should consider getting an IPA and avoid headaches and money losses down the road.
Speak to one of our friendly mortgage specialists for unbiased advice and recommendations on an IPA.
One of the biggest risks of house-shopping without an IPA is that you stand to lose your option fees, which can range from 1% of your property purchase price for private resale properties to 5% for new launch properties.
For example, let’s say you are buying a resale condo worth $1 million, which means the OTP fee would cost $10,000. Now if you have paid the OTP fee and you later find that you don’t qualify for the loan, you might lose all the money.
Please note that there is no legal recourse to get your OTP fee refunded. You will just have to rely on the seller’s generosity. However, there is an exception for buildings under construction (BUC) where the option fee is 5%; in this case, if you cancel, you can recover 75% of it.
To start with, you need to get in touch with a DollarBack Mortgage consultant who will conduct an indicative analysis to understand if you meet the minimum borrowing requirements as suggested by the regulators.
In this preliminary evaluation, our mortgage consultant will evaluate parameters like the Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR) for your loan amount and guide further on how to get your approval for IPA across all major banks in Singapore.
If you are a first-time homebuyer with no prior experience of buying a property, you could probably relate to how confusing things can get when you come across financial terms and jargon related to housing loans.
By applying on our IPA housing loan page, you will be able to get expert assistance for IPA application completely free.
Please note that if you find a better interest rate or change your decision of buying a home at that point in time, you can let the IPA validity period lapse or apply for a home loan through another bank.
For urgent applications, DollarBack Mortgage helps you get an IPA on the same day in a matter of few clicks assuming healthy credit history. Moreover, our IPA process is paperless, hassle-free and saves you valuable time by allowing you to contact us from the comfort of your home or office.
Applying for the IPA to any bank is free of charge, so you don’t need to worry about any financial implications if you decide not to proceed with the home loan after you have gotten the IPA. In a nutshell, there is absolutely nothing to lose in applying for an IPA.
DollarBack Mortgage has a completely free and fuss-free IPA service to help first-time homeowners get started.
An approved IPA is valid for up to 30 days (or 24 working days) but it can vary across banks. During this validity period, if you have submitted an Option to Purchase to the bank, it will provide an official offer letter for a home loan. It is best advised not to apply for any credit cards, car loans or any type of loans during this period of 30 days.
It is always recommended to confirm the validity of your IPA so that you are better informed on how long you will have to commit to a property before it expires. After the validity period expires, you can re-submit your application. But that will mean going through the hassle of submitting all your documents again.
Unfortunately, it is possible that your IPA application may get rejected. If the bank is unsure of your ability to pay back the requested loan amount, it may cancel your request for an IPA. There could be several reasons for this to happen – a high TDSR or bad credit history. However, if rejected, the bank will instead provide an estimation of the maximum loan amount you can get at this stage.
Let’s take a quick look at the most common reasons why IPAs are denied:
If you have been denied an IPA, don’t despair. It is not the end of the world but a wake-up call to learn better manage your financial matters. There are many options that you can go for and do away with the reason your IPA application was rejected. Get in touch with one of our DollarBack Mortgage experts to help and advise you in this regard today.
Despite being an ‘optional’ step in the house purchasing process, an In-Principal Approval can be very useful. It gives a head start in house-hunting and make the process smoother. There is absolutely no reason for serious homebuyers to not get an IPA.
With DollarBack Mortgage, securing an In-Principle Approval can be done quickly from the comfort of your home or office. Plus, there are no fees applicable to the bank or DollarBack Mortgage for IPA applications.
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