While discussing loans, both in-principle and actual approval are regular terms thrown around all the time, but what do they mean to the customer? Before you ask which one is the better option, let us clarify that they are not two competing options at all, but two separate terms applicable in different stages of the loan approval process. To make more sense, it is necessary to define the two first.
What is In-Principle Approval?
Also known as Approval In-Principle (AIP), your In-Principle Approval (IPA) is equivalent to the maximum possible loan total that a bank estimates you to be eligible for. As explained by Property Guru, the type of in principle approval Singapore expects is calculated only after considering the applicant’s current credit score, credit history, present income, and CPF donations. Visit the site for more info on finding house loans and mortgage refinancing options.
What is an Actual Approval?
An Actual Approval (AA) is simply the final stage of a loan approval process where the estimated loan total calculated by the bank is approved and transferred to the applicant. So, the primary difference between in-principle approvals and actual approvals is that the former is an estimate, while the latter is a confirmation of the said estimate.
Can the In-Principle Amount and the Actual Approval Amount be Different?
Yes, there may be differences between the total estimated amount (IPA) and the final loan amount granted (AA). In fact, it isn’t unlikely for a bank to drastically reduce the actual approved amount or even completely reject a loan application, even if they estimated a high IPA for the client initially. This may happen if:
- The bank’s estimate was incomplete, out-of-date, or inadequate
- They found financial evidence in relation to the client later, which jeopardizes their interest
- The client’s history identifies him/her as a difficult individual to collect debts from
- There is evidence of financial record falsification
Other than that, there may be a small difference between IPAs and AAs even if things are in order. Additional fees, taxes, changes in interest rates, etc. might lead to there being a slight difference between the estimate and the final approval amount.
What Type of Loans are IPAs Used for?
There is virtually no limit here, as in-principle approvals are often used frequently for most types of loans, including house loans, renovation loans, car loans, credit lines, credit cards, etc. Of course, home loans and car loans hold most relevance because these are the two most expensive financial products that a bank sells to the average person. While a bank will likely call you for “instant loans,” “pre-approved credit cards,” etc. you will have to contact the bank for getting an IPA for car and home loans.
IPAs in Singapore: Are You Aware of the Rules?
There are universal factors that apply to bank IPAs as well, but we will focus on the important rules and regulations which every potential home buyer should be aware of in Singapore:
Agreement
– Understand that an in-principle approval is not just a rough estimate, but an actual agreement with the bank in question. Although the particulars may differ a bit, here’s what the agreement entails; The applicant and the bank come to an agreement that the former has intention to borrow the estimated amount from the latter within a period of 30 days.
Non-Binding
– In Singapore, an IPA agreement does not legally bind you or the bank to follow through. What that means is that the bank can still deny the loan to the applicant, and the applicant himself/herself can also refuse the bank’s offer. Neither party can be held legally responsible for not following through with the IPA agreement.
What are the Benefits of an IPA?
Despite there being no legal constraints, that is actually an advantage for the applicant in particular. It allows you to compare several IPAs from different banks and choose one that best suits your needs for the home loan. That’s not the only benefit of course, as in-principle amount estimates help with financial planning before and after the big purchase.
Once you know, understand, and accept the following three key financial determinants, you should be able to make a financially sound decision:
- The amount of money you already have available for the purchase
- The amount of money you need to complete the purchase
- The maximum amount of money that banks will loan out to you for the purchase
As IPAs are all about figuring out the third determinant, they are crucial for forming a sound home loan repayment plan accordingly.
Now that you know what IPAs and AAs are, as well as having a clear idea regarding what the difference is, do pay attention to the advantage part as well. There is a reason why the estimates are not legally binding, and it’s a conscious decision by the SLA to grant more freedom to the buyers.