If you are planning to buy a home in Singapore and need a bank loan, getting and understanding In-Principle Approval (IPA) should be one of your first steps. Many homebuyers mistakenly believe they can secure financing at any time only to be faced with unexpected issues. Without an IPA, you could risk losing your dream home or even forfeiting a huge deposit.
This article will guide you through everything you need to know, what you need when understanding In-Principle Approval (IPA), how it works, why it is necessary. It will also include the process of securing an IPA, what banks look for, and how to calculate affordability before making a commitment.
In-Principle Approval (IPA): What Is It?
An In-Principle Approval (IPA) is a non-legally binding agreement from a bank stating that they are willing to lend you a home loan up to a specific amount. This means that while an IPA confirms your eligibility for a loan, the final approval still depends on the property’s valuation and any changes in your financial status.
In other words, IPA is like a financial green light where it gives you clarity and certainty on how much you can borrow and what kind of property you can afford. Without it, you might end up short on funds before the completion of your home purchase.
What Will the Bank Look at for IPA?
When applying for an IPA, banks will assess several factors to determine how much you are able to borrow. These factors include your income and employment stability, total debt servicing ratio (TDSR), credit score, existing loans, financial commitments and loan tenure.
Your Income and Employment Stability
Banks prioritize applicants with stable employment and a steady income. Self-employed individuals or those with variable incomes may need to provide additional supporting documents.
Total Debt Servicing Ratio (TDSR)
The TDSR framework limits your monthly debt repayments, including home loans, car loans, and credit card debt, to 55% of your gross monthly income.
Credit Score and History
A good credit score increases your likelihood of loan approval. If you have a bad track record with late payments or defaults, the bank might lower your approved loan amount or reject your application.
Existing Loans and Financial Commitments
Banks will check if you have outstanding loans, such as student loans, car loans, or personal loans. This may impact on your capacity for borrowing.
Loan Tenure
Most banks allow up to 30 years for a private property loan and up to 25 years for an HDB loan, if loan term does not exceed your retirement age.
Importance and Benefits of In-Principle Approval (IPA)
Understanding In-Principle Approval (IPA) and getting an IPA before committing to a home purchase offers several advantages such as avoiding a loss of deposit, efficiency, and bargaining power.
Helps You Avoid Losing Your Deposit
In Singapore, when you secure an Option to Purchase (OTP) for a private property, you must pay 1% of the purchase price as a booking fee. If you back out later due to loan rejection, this money is non-refundable. For a property that costs $1 million, that equates to a loss of $10,000.
Understanding In-Principle Approval (IPA) Saves Time and Makes Your Property Search More Efficient
An IPA ensures you only look at properties within your financial means. Without an IPA, you might waste time viewing homes that you cannot afford. The bank might also offer a lower loan amount than expected.
Strengthens Your Position as a Buyer
Property agents and sellers prefer buyers with an IPA because it shows their commitment and financial capability. This makes negotiations easier and increases your chances of securing your dream home.
Speed Up the Loan Approval Process
Since an IPA involves a preliminary review of your financials, the final loan application process will be smoother and faster when you decide on a property.
Bargaining Power
With an IPA, you know exactly how much you can afford. This allows you to negotiate better and make confident offers without the uncertainty of loan approval.
Get an Estimate with Singapore’s TDSR Calculator
Before applying for an IPA, it is a good idea to estimate your loan eligibility using the Total Debt Servicing Ratio (TDSR) calculator. This tool can help you determine how much you can borrow based on your income and existing debt obligations. You can head to https://www.redbrick.sg/tdsr-calculator/ to calculate your TDSR.
Secure an IPA with Redbrick Mortgage Advisory
Navigating the IPA process can pose complexities, especially if you are unsure which bank to choose or how much you can borrow. Mortgage brokers like Redbrick Mortgage Advisory can help compare home loans, provide financial advice, and assist with the IPA application process.
By securing an IPA before house hunting, you avoid unnecessary risks, increase your negotiation power, and speed up your home purchase.
In a Nutshell: Understanding In-Principle Approval
An In-Principle Approval (IPA) is necessary for any homebuyer financing their purchase with a bank loan. It provides clarity, security, and a competitive edge in Singapore’s property market. Before making any commitments, ensure you have an IPA to avoid any unexpected financing issues.
If you are planning to buy a home soon, start by checking your loan eligibility and securing an IPA, you will thank yourself later!
