Housing Loan Pitfalls that You Should Watch Out For
Take a minute to peruse this article and it may save you from financial woes and disappointments later.
Before you put down the booking fee, also known as option fee, to obtain the option to purchase for a residential property, you might want to secure an approval-in-principle loan first. This is to ensure that you have the financial resources to close the deal as part or all of the booking fee can be forfeited if the option to purchase is not exercised within the validity period. For a resale private house and a resale HDB flat, the booking fee are 1% of the purchase price and S$1000, respectively. All of it will be forfeited if the option to purchase is not exercised. For a new completed or under-construction private residential property, the fee is 5% to 10%, 25% of it will be forfeited shall the deal fall through.
In addition, the valuation of the property may fall unexpected between the time the option is obtained and a loan is found. 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 (this can happen during a financial crisis). 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.
Do note that you are allowed to change financiers even after obtaining an approval-in-principle loan from a financier. You do not want to be caught flat-footed, so try securing an in-principle approval before laying down the booking fee, you can still shop around for a better loan if property valuation has not fallen.
Lawyers or bankers recommended by property agents
You should exercise caution with regard to lawyers or bankers recommended by an agent. Sometimes the agents get a commission from such recommendation.
As a result, the lawyer may charge you a higher than normal fee to make up for the referral fee paid to the agent. Or the banker may not offer the best loan that fits your financial risk profile.
You are only allowed to use a conveyancing law firm that sits on your financing institution’s list of firms. However, some conveyancing law firms sit on some banks’ lists but not others, so if you select these firms you may have to incur extra legal costs if you switch to another bank later. This is because if the conveyancing lawyer is not on the panel of the new financing institution, you will have to change the lawyer and the new lawyer will charge additional fees for taking over the legal work.
So always try to opt for a conveyancing lawyer that sits on the panel of all the banks in Singapore.
Extra loans before disbursement of mortgage loan
Avoid taking any new loan before applying for a home loan. Banks assess applicants’ debt-to-service ratio (DSR) before granting a loan. This is to make sure that borrowers have the financial means to service all their debts.
Going a step further, this also applies to the interim period after obtaining an in-principle approval but before loan disbursement. This is because the financier still has the right to pull back the loan or change the conditions of the loan anytime before loan disbursement. A case in point:
A week after Person A had obtained an approved-in-principle home loan, he went to purchase a car and financed it with a car loan. Two weeks later, the financier who was to grant formal approval for the mortgage discovered Person A had taken a car loan too. Consequently, the financier substantially reduced the loan quantum. Because of the reduction, Person A could no longer afford the house so the deal fell through and he had to forfeit the 1% booking fee.
Therefore it is important to check with a home loans expert before taking on a new loan obligation.
On a last note, avoid job changes before applying for a mortgage loan. Some banks want applicants to be in the same job for a minimum period of time before loan approval. This demonstrates to the bank that you have a stable job and income; hence the means to repay the loan.
For advice on a new home loan.
For refinancing advice.
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