Picture this: You’re a prospective home buyer and you’ve shortlisted a handful of properties. You’ve also done your financial homework to give yourself the best chance of comfortably servicing your mortgage for the next 20 to 30 years. You decide to proceed with the home transaction, but your bank discovers that you defaulted on a credit card payment several years back during the loan approval background check. You do not receive the loan you applied for, the home sellers absorb your deposit, and other buyers have staked claims to the rest of the properties on your shortlist.
The above situation outlines an unfortunate, but also very likely scenario for home buyers who enter transactions without a home loan In-Principle Approval (IPA). Home purchases are some of the largest expenses most people will make in their lifetimes, and you’ll want to lock in your loan to avoid a financial disaster. Also known as Approval-in-Principle (AIP), IPAs are document guarantees from lenders that you can exercise if and when you require a home loan.
What is guaranteed in a home loan In-principle approval?
Banks will only lend out as much as they are confident of receiving in return. This amount is determined by a couple of metrics, including your income, credit score, Mortgage Servicing Ratio, and Total Debt Servicing Ratio. Based on these numbers, banks will determine the following in your IPA:
- The loan amount you are eligible for
- The length of your loan tenure
In essence, your IPA loan amount determines the upper limit on properties you are eligible to purchase. For example, if your bank clears you for a maximum loan of $750,000, then you can purchase properties that are valued up to $1,000,000 according to the 75% loan-to-value limit (assuming that you are taking a home loan for the first time).
While the amount of loan you’re approved for rests largely on your income, self-employed persons should take note that most banks will moderate their income by 30%. This means that if you earn $1,000 a month from side hustling, the bank will only add $700 to your monthly income as they consider self-employment to be a less stable income stream. Unfortunately, full-time freelancers will get the short end of the stick as their entire salary will be moderated by 30% during IPA evaluation.
There are ways to mitigate this, however, if you are financially savvy enough to have set up several other income streams. Banks will take into consideration earnings from investment dividends, rental income, and earnings from small businesses – although approval is highly subject to their discretion. While it definitely takes time to build up these income streams, early planning can set you up for receiving a higher loan if you feel so inclined.
Why do home buyers need a home loan IPA?
As illustrated in the introduction, not arming yourself with an IPA can force you to make the costly decision of defaulting on your Option to Purchase (OTP). If you are buying an HDB, that amount can cost as much as $5,000 depending on how negotiations with your buyer goes.
While $5,000 is a substantial sum, things can get even worse if you’re purchasing a private property. Typically, a 1% OTP deposit is required for private property owners to commit to a sale. That’s a staggering $25,000 forfeited for nothing, if you do not secure a loan for a $2.5 million home in time.
Apart from securing a loan to avoid going up the property purchasing creek without a paddle, home loan IPAs also provide home buyers with a leg up during the negotiation process. Securing a home loan is crucial in giving you a headstart to your home buying journey.
How long are IPAs valid for?
Having an IPA qualifies you for specific loans as long as they are valid. This period varies between banks, but you can expect the validity period to last approximately 30 days. The good news is that banks are usually pretty flexible when it comes to IPA validity. IPAs are not issued lightly, after all.
Loan applicants are subjected to stringent background checks before being approved for loans. Barring any major change in your financial situation such as a loss of income or getting embroiled in a lawsuit, your loan will likely be granted even if you request for it slightly outside of the validity window.
How do home buyers secure an IPA?
Securing an IPA is straightforward in principle. You’ll want to compare the home loan options available out there and narrow down your options based on your financial situation and type of property you wish to purchase.
Once you have a shortlist, simply submit the required documents (including proof of income and CPF contribution history) to your lender of choice and sit back while they process your application.
If you do not wish to deal with the hassle of comparing home loan options between banks, Ohmyhome mortgage specialists offer home loan curation services free of charge to help streamline your home transaction process.
Other frequently asked questions (FAQs) about IPA
What is a pre-approval?
Even if a bank grants you a pre-approval on your IPA, they are still not legally binded to offer you a loan. Should you decide to purchase a ridiculously expensive home, the bank is within their rights to withdraw their initial offer. Barring that situation, however, most home buyers can rest assured that banks will keep their word on pre-approvals.
What is a pre-qualification?
Not to be confused with pre-approvals, pre-qualifications are rough calculations conducted by the banks to give you a ballpark figure of how much they will potentially be able to provide a loan for you. Think of it as the bank’s equivalent of a free online financial calculator. In pre-qualifications, banks will run rough numbers without requiring you to submit any documents.
Of course, because pre-qualifications are just estimates, you can still be rejected for a home loan, or receive a much lesser loan amount, should banks discover information that you’ve withheld during their background checks.
How long will it take for my IPA application to be approved?
IPA approval varies greatly on a case-by-case basis. Depending on how much clearance they have to do, the process can take as little as 1-2 days, or as long as several weeks. To expedite the process as much as possible, be sure to provide banks with as much documentation as possible about anything relating to your finances and assets.
Engage super agents for a worry free home purchase
IPAs are a prime example of how costly miscalculations in home transactions can be. Picking a reliable agent who will ensure that no stone is left unturned in your loan approval and home transaction process can save you thousands of dollars and a world of headache.
Do home transactions the smart and fast way with Ohmyhome’s smart data-matching technology, we can MATCH you with the right home that fits all your investment needs. Simply submit your preferences and let our algorithm do all the work. Our Super Agents will contact you via WhatsApp the moment a match is found.
Call us at 6886 9009 to get the best deals on your next investment home with any of our Super Agents or message us in the chat box at the bottom right-hand corner of the screen. If you’re on the go, we’re also available on WhatsApp at 9755 1009. Because at Ohmyhome, we’re always by your side, always on your side.