A Quick Guide to Approval-in-Principle (AIP) for Home Mortgages
Approval-in-principle (AIP) for home loans, or mortgage prequalification, are conditional approval. AIP can be sought for loans of private residential properties or HDB flats. Such loans are known as pre-approved loans. The time between submitting an application for an AIP and knowing the outcome can be as fast as 15 to 60 minutes. The validity period of the AIP varies between 14 to 30 days. During this period, financial documents have to be submitted to obtain a formal offer. After which, a Letter of Offer will be issued if the loan is approved. If the required documents are not submitted within this period, you can still re-apply for the AIP.
Having an AIP lets you know the loan quantum you are eligible for and the monthly repayment amount.
An AIP is non-binding for both the applicant and the financier; therefore you are allowed to change financiers even after obtaining an approval-in-principle loan from the financier. You may even change loan package with the same financier that you have obtained the AIP from.
If you are confused about AIP, you can have a FREE discussion with a Singapore home loan consultant.
Why you should have an AIP?
Narrow down the property search
Having an AIP lets you zero in on the property you know you can afford to buy. Thus you will not be wasting time viewing properties that you later find to be out of your budget when you apply for that loan. This also explains why some property agents only work with buyers who already obtained an AIP.
Being certain that you can afford that property allows you to commit immediately when you have found your ideal property. There is no waste in time between obtaining the loan and closing the transaction. Indeed during that interval, some other buyers may beat you in buying the property.
Forfeit of booking fee
To prevent other buyers from buying, you may choose to sign the option to purchase (OTP)
and lay down the booking fee, before you have obtained the loan.
But this may not be the best course of action as you may not be able to obtain an ideal loan with a favourable rate, or even if you do it may be with a lower loan quantum. In the latter case, the deal may fall through if you do not have sufficient cash or CPF fund to top up the shortfall.
Should the deal fall through, you will have to forfeit part or all of the booking fee (The booking fee and forfeit amount will depend on whether it is a private house or HDB flat and if it new or resale).
In another scenario, you may be able to obtain the maximum loan-to-value ratio (LTV), but the valuation of the property has fallen during the interval in which you had signed the option and obtained the loan.
For example, the purchase price you agreed on is $1.5m, but when you have obtained the loan the valuation of the property has dropped to $1.2m. Assuming that you are eligible for a 80% LTV, you thought you could obtain financing up to $1.2m, but because of the lower valuation you can only secure $960,000. If you do not have the means to make up for the $240,000 difference, you cannot seal the transaction. However, such situations are extremely rare and only happen during financial crises.
Things to be cautious about
As an AIP is provisional, the bank still can reject the application if there are any changes to your financial status. So avoid taking other loans or changing jobs before the Letter of Offer is issued.
Just because an AIP is provisional does not mean you should randomly select a bank from which to obtain an AIP, thinking you can secure the same loan quantum from other banks later. That particular bank may be offering uncompetitive rates and loan features. And you may later discover that you are not eligible for the same quantum from other banks.
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