Singapore has a whopping 90% homeownership rate and yet, studies show that fewer than one in five Singaporeans state they are ‘very familiar’ with the home loan process.
Hence, unsurprisingly, many homeowners confuse loan pre-approvals (also known as In-Principle Approval (IPA)) with pre-qualification. Although similar, confusing the two could potentially cost you anything from a few thousand dollars to even six-figure sums.
With this article, we hope to clarify any misconceptions prospective homeowners may have. We will explain what is an IPA – including why you should get one before buying a property – as well as the key differences between pre-approvals and pre-qualifications. We will also illustrate how failure to understand these differences could end up in hefty and unnecessary costs.
- What is In-Principle Approval (IPA)?
- Pre-Approvals vs Pre-Qualifications
- Consequences of skipping IPA
What Is In-Principle Approval (IPA), aka Approval-in Principle (AIP)?
An In-Principle Approval (IPA), sometimes also referred to as an Approval-in-Principle (AIP), is essentially a commitment by a lender that they will extend you a home loan – up to a specific amount and tenure – if you so choose. For those in the corporate world, think of an IPA as akin to a term sheet or memorandum of understanding.
Getting an IPA helps you to budget for your upcoming property purchase. For example, if you have an IPA for $600,000, then you can probably buy a property that costs up to $800,000 (based on a loan-to-value limit of 75% for your first home loan).
Pro Tip: Use PropertyGuru’s Mortgage Affordability Calculator to work out a comfortable budget for your property (here are 7 reasons you should use this calculator).
A typical IPA is valid for 30 days, so if you’re still in the ‘window shopping’ phase of your property search, you may think it’s a little premature to get an IPA. However, most of the time, it’s okay to get be a little ‘kiasu’ because the banks will likely still approve your loan subsequently unless something material has taken place (such as loss of job and/or income, bankruptcy, legal suits, additional debt, etc).
Here are the three steps you need to follow to secure an IPA:
- Choose your preferred lender(s). In the first step, you want to compare the various home loan options offered by the banks and narrow it down to one or two. To make your search easier, go to the PropertyGuru Finance loan comparison page to compare the interest rates and other features of all the home loan packages currently available. You can also choose to speak to one of PropertyGuru Finance’s mortgage experts to get a personalised recommendation for free.
- Apply for your IPA. If you intend to individually apply with different lenders, the process may vary from bank to bank, making it quite tedious. Hence, the easiest way is to let PropertyGuru Finance handle the IPA application for you (for free!). The documents here will be mostly similar to what you would need to provide in a standard home loan application, such as proof of income and CPF contribution histories. Previously, you would have needed to submit your credit card statements as well, but this is largely done away with as the same information can be obtained from your Credit Bureau Report.
- Sit back and wait. It’s in the banks’ hands now. They will go through their own assessment process and, if you pass, issue you your IPA. But each bank’s assessment process is different, which leads to…
Potential confusion between pre-approvals and pre-qualifications.
Here’s Paul Wee, Vice President, Fintech, at PropertyGuru summarising the key differences.
Shopping for a home loan? Compare the best mortgage rates from DBS, Citibank, CIMB, Bank of China (BOC), Hong Leong Finance and more.
Pre-Approvals vs. Pre-Qualifications – What You Need to Know
The difference between pre-approvals and pre-qualifications can be summed up by the lender’s level of commitment. Now, keep in mind that pre-approvals (IPA) are not legally binding. The loan is still subject to the value of the property you plan to buy, and the bank can technically ‘go back on their word’ with no legal consequence. But in practice, when you get a pre-approval the home loan process is more or less ‘90% done’.
In a pre-qualification, however, the lender has not given you any commitment. Rather, it is a rough gauge outlining how likely you are to qualify for a certain loan amount. To do this, the bank will ‘run the numbers’ for you – examining your income and financial commitments to make this estimate. But unlike a pre-approval, they will typically will not have run any legal, bankruptcy, or credit checks at this stage.
The confusion between the two stems from how each bank operates. Some banks may have a pre-qualification as a preliminary stage before pre-approval. In such cases, you may obtain a pre-qualification but still fail to get the desired approval. What might happen is:
- A subsequent credit or legal check uncovers negative information and the bank elects not to proceed with pre-approval (this is why it’s so important to have a good credit rating)
- They give you a pre-approval, but for a much lower amount than what you expected from the pre-qualification
Other banks may skip the pre-qualification step entirely. Further, in many cases, pre-qualifications can be very informal – they can arise from nothing more than a simple phone call or conversation with a bank officer. On the other hand, pre-approvals are always formalised, requiring you to submit official application forms and documents.
Because of the variations between banks, it is important you always, always clarify with the lender whether what you have received is a pre-approval or a pre-qualification. And if you’re thinking of skipping the IPA step – don’t.
Skipping the IPA Step Could Potentially Cost You A Lot Of Money
Let’s circle back to the beginning of this piece, where we warned that mistaking a pre-qualification for a pre-approval could potentially cost you tens of thousands of dollars. The same could happen if you decide to skip the IPA step, and the reason is because of the Option to Purchase (OTP) fee.
The OTP fee is essentially a ‘booking fee’ to reserve the property and it typically costs 1% of the property purchase price. For a $1 million private property, that’s $10,000! If you pay the OTP fee and subsequently find out that you don’t qualify for the loan, you’re out of luck – there’s no legal recourse to get the seller to return the OTP fee to you (you’ll have to rely on the goodness of their heart). (The exception is for buildings under construction (BUC), whereby the option fee is 5% and if you cancel, you can recover 75% of it.)
And while that’s the most compelling reason to get an IPA, it’s not the only one. If you don’t have an IPA, here’s what is also likely to happen:
- Your property search is inefficient. As we said, you don’t need an IPA in the early stages. But it would be extremely difficult to really narrow it down without knowing more accurately how much you can borrow.
- Property agents may prioritise other buyers with an IPA. This seems harsh, but an IPA essentially brings them one step closer to a successful deal. Without an IPA, there’s a huge risk the agents may end up doing a lot of work for nothing.
- It will be harder to bargaining. Without an IPA, it’s harder to be certain of the maximum amount you will be able to pay for a property. How can you effectively bargain without this knowledge?
- The closing process takes longer. Even if you do manage to overcome the previous hurdles and subsequently get your loan approved, the whole process will be drawn out… and for nothing.
Bottom line – there is absolutely no reason why you should not get an IPA once you start getting serious about your property search.
Get the process started by speaking to our friendly mortgage experts. You can also fill up this form for free advice and recommendations on IPA.
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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people’s financial literacy levels – a necessity in our modern world.
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