Buying a house in Singapore can be stressful. Between saving money for your downpayment, preparing all the documents you need and seeking advice on affordability and your financial situation, there’s a lot to consider.
A recent report found that less than one in five Singaporeans are familiar with the home loan process. But with average property prices hovering around $1 million, most buyers will need a mortgage in order to turn their home ownership dreams into a reality. This means understanding how home loans work is vital.
If you’re planning on purchasing a property in Singapore using a bank loan, you’ll need an In Principle Approval or “AIP” first. This is a preliminary agreement between you and your bank, stipulating that your lender will grant you the home loan package you need when you find a property.
Having an In Principle Approval is absolutely vital to the house buying process – and this article will explore why.
What is In Principle Approval (IPA)?
An In Principle Approval or IPA, which may sometimes be referred to as an AIP, is essentially a bank loan pre-agreement. Your bank is basically making a commitment to extend you the home loan you need once you find your perfect home.
Your IPA or IAP will stipulate the loan amount and tenure (i.e. length) your bank is willing to offer you, based on an assessment of your credit background and financial situation.
Benefits of having an IPA or AIP include:
- It can be used as a planning tool, helping you determine your affordability
- It acts as proof of your creditworthiness when you’re viewing properties
- You’ll have peace of mind that you’ll get the loan you need, as long as you meet the IAP’s terms
- You won’t lose your Option to Purchase (OTP) – more on this later!
Once you have your IPA, you can go house hunting with the knowledge that your bank or lender has your back, and that you’ll definitely get the deal you need as long as you abide by the IPA’s terms and conditions.
Why Should I Get an IPA?
On top of the benefits and basic information we mentioned above, there are a number of reasons that obtaining an IPA or AIP is absolutely vital to the property purchase process. These are:
1. You won’t lose your Option to Purchase (OTP) fee
Having an IPA or AIP protects you from losing your Option to Purchase fee or “OTP fee” in the event that a sale falls through. An Option fee is essentially a booking fee you must pay to reserve your desired property for purchase. It typically costs 1% of the property value – which can often be a large amount of money – so the last thing you want is to lose it!
2. It’ll be easier to find a property agent
Here in Singapore, it’s quite common for property agents to favour buyers who have already received an IPA. Any sellers or property owners you engage with while house hunting will also look more kindly upon you if they know a bank has already committed to granting you a mortgage.
3. It’s easier to bargain with an IPA
As we mentioned earlier in this article, an AIP can act as a planning tool that helps you determine your affordability, budget and the maximum loan amount you can realistically borrow. This can provide a lot of clarity during the negotiation process and make it much easier for you to gauge how much you should be bargaining for when speaking to property owners or agents.
What Are the Requirements for an IPA?
With Singapore’s property values skyrocketing, people are increasingly turning towards bank loans to help them cover home purchases. This means that getting an IPA or AIP is essential, regardless of whether you’re looking for a HDB flat or private property.
What is required of you will always differ from bank to bank. In most cases, you will need to provide evidence of the following to apply for an IPA or AIP:
- Pay slips and income information
- Your CPF contribution history
- Credit card statements and details of any other debts
- Details of any existing housing loans you may have
Naturally, you will also need to fill in an application form and ensure you can realistically afford the downpayment on a home that meets yours and the banks’ price expectations under the IPA later down the line.
It’s important to remember that IPA or AIP agreements are not legally binding – which means that your bank can go back on its word and break the commitment if you do not fulfil the IPA’s terms and conditions. For example, if home hunting leads you toward a property with a higher purchase price than what the bank has agreed to lend you.
What’s more, an IPA granted by one bank cannot be used at another and, depending on your bank, you may have to go through a “pre-qualification” stage before you can obtain “pre-approval” and physically have your IPA to hand. We’ll explore how this works in the next section of this article.
Pre-Approval vs. Pre-Qualification: Don’t Get Confused
Depending on the level of commitment your bank is willing to hand out to potential buyers before they have found an actual property to buy, a “pre-qualification” stage may be required before a pre-approval (or IAP) is granted. The home buying process can be confusing, especially when you’re dealing with complex financial services, but Loan Advisor is here to help – so let us explain the difference between the two to clear up any misunderstanding.
This is the bank’s process of screening you as a potential homebuyer to see whether you qualify for an IPA or AIP. At this stage, the bank has not given you any commitment. A pre-qualification should be considered nothing more than a rough guide outlining how likely you are to qualify for an IPA.
A pre-approval typically means that your home loan is 90% done. All legal, bankruptcy and credit history checks have been completed and an AIP is issued to confirm that you are entitled to receive your funds once you’ve explored your options and found a suitable property.
No two banks are ever the same. Each bank tends to operate a little differently from the last and you should check your desired lender’s website for full details of their services, AIP application process and more to get an idea of what to expect. Remember, there will always be more than one option available to you – so review what each bank is offering before you make a decision on which one to use.
After applying, a top tip would be to always ask the bank whether what you’ve received is a pre-qualification or a pre-approval – so you can get an idea of where you stand and whether it’s safe to start house shopping for your new place.
What if the Bank Rejects My IPA Application?
There are several reasons that a bank might reject your IPA or AIP application. However, as each bank will always have slightly different lending criteria than the last, you shouldn’t worry, as there’s a good chance you can always apply elsewhere.
The two most common reasons IPA or AIP applications are rejected, are:
- Issues are found with credit history checks
- The bank is unhappy with your legal or bankruptcy history
- The loan amount you are seeking is too high according to affordability checks
If you are rejected, you can either approach another bank, or consider one of the following IPA alternatives:
1. Do some research on banks
Just because you can’t get an IAP doesn’t mean you can’t shop around to see which bank websites and other financial institutions might grant you a home loan. Loan Advisor’s home loan matching service can help you compare interest rates and special features between housing loans with your desired loan amount all in one place. It’s fast, free and super-straightforward.
2. Use an online affordability checker
One of the biggest pros of getting an IPA is that it helps you determine real-world affordability before you start home shopping – but it isn’t the only option. Use an online affordability checker website like Loan Advisor, or DBS property marketplace to get a good idea of what home loan amount you can afford, then explore your options.
3. Get the Most Out of Your Home Loan Search with Loan Advisor
If you want to find the best home loan option to suit your financial situation, save time with Loan Advisor’s home loan matching service.
In three simple steps, our search tool compares home loans from multiple banks in Singapore and sends you the results in seconds. We’ll find you a deal that fits your budget, regardless of your down payment and loan amount needs.
Preparing for Your IPA Application
Before filling out an In Principle Approval application form, always ensure the following:
- Make a decision to use banks that offer the most competitive rates at the time
- Prepare all necessary documents – from pay slips and income evidence to credit card statements
- Evaluate your financial records for accuracy
- Update any ID cards if necessary
- Check whether your bank requires pre-qualification
Happy House Shopping!
So, let’s quickly summarize the key points of this article:
- An IPA or AIP is a preliminary agreement that your bank will extend you the funds you need
- A pre-qualification stage may be required
- You’ll need to prepare – and double-check – all the relevant documents before applying
- An IPA is not legally binding and you must meet the terms and conditions
If you take one thing away from this article, let it be this: In Principle Approval is a vital part of the property purchase process if you want things to go smoothly with property agents, sellers, lenders and your eventual purchase.