Just applied for an in-principle approval (IPA) for your home loan but didn’t receive your desired outcome? This guide will cover six possible reasons why.
So, you’re warming up to the idea of moving into a new home that has caught your eye. But knowing the asking price alone isn’t enough to help you decide if you can afford it or not. It is extremely rare for a buyer to pay for their house in full. After all, most of us have to take up a home loan or mortgage to slowly finance the property over a span of up to 30 years.
While working out your sums and researching the various other expenses like stamp duties, agent commissions and renovation costs, you may also want to consider applying for an In-Principle Approval (IPA) too.
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If you need an In-principle Approval (also known as Approval-in-Principle), PropertyGuru Finance can help you with it too.
What is an In-Principle Approval (IPA)?
Before we get into the reasons why your IPA may be denied, let’s recap a little on what an IPA is and what it is used for.
Essentially, an In-Principle Approval (IPA) is a way for you to estimate and get a sense of how much the bank is willing to lend you. It is, however, not legally binding (in other words, an IPA does not guarantee that the bank will loan the amount stated on the IPA) and should only be taken as an estimate. Once you have decided on the property to buy and your preferred lender, you will need to formally apply for your desired home loan again.
That said, an IPA is still a very useful tool, especially if you are seriously shopping around for a property. By having a good sense of how much the bank may lend you, you lower the risk of losing your Option-to-Purchase (OTP) fee in case you don’t qualify for the required loan amount.
For a hassle-free experience, you can apply through PropertyGuru Finance here.
Reasons Why your In-Principle Approval (IPA) May be Rejected
If you know that you’re not in good financial standing personally, you’d probably not be looking at purchasing a new property. Unless of course, you’re hoping to downgrade and flip your existing property, in order to use the profits to get you out of your quagmire. However, that’s another article altogether.
If there are problems that would keep the bank from approving your IPA, their representatives would likely advise on the outstanding points that need to be addressed. After all, it is in their interest for you to get an IPA as this would pave the way to you becoming their customer when the time comes to apply for a home loan.
To greatly improve your chances and smoothen the process, you may want to do an honest self-assessment and consider these common reasons that IPAs are denied:
1. Currently Bankrupt or Have A History of Bankruptcy
For obvious reasons, a history of bankruptcy represents a high lending risk to a bank. As there is no automatic discharge of bankruptcy in Singapore, you have to seek either of three ways to get out of this situation.
Annulment of the Bankruptcy Order
This is when a bankrupt pays his debt in full or makes a settlement offer of at least 75 per cent of the total debt owed. If the settlement is accepted by the creditors, a Certificate of Annulment can be issued and puts the debtor in the same position as if no Bankruptcy Order had been made against him. It does not, however, release the debtor from any provable debts which have not been filed against him when the bankruptcy was in force.
Discharge by High Court
A bankrupt may apply to the High Court for an Order of Discharge. The High Court makes its decision based on the views of the Official Assignee and the bankrupt’s creditors. Other factors will also be taken into account such as, the bankrupt’s age and earning capacity, as well as his assets. Additionally, the High Court will also take into account the monthly installment payments, if any bankruptcy offenses were committed and if the bankrupt has co-operated fully with the Official Assignee in the administration of the bankruptcy estate.
Discharge by Certificate of the Official Assignee
The Official Assignee may discharge a bankrupt without have to go to the High Court when at least 3 years have lapsed since the bankruptcy started and if the proven debts do not exceed $500,000. There are also other factors that have to be taken into account which you can read more about here.
2. Bad Credit History
This is much easier to sort out than bankruptcy since it can be resolved without involving the High Court or Official Assignee. If you have missed some payments, had your car repossessed or have credit cards suspended or revoked, this behavior will count against your credit score. A history of poor repayment conduct is a surefire way to get your IPA denied.
Fixing this is pretty straightforward — pay off your credit cards or personal loans or at least pay it down as much as possible.
3. Too Many Credit Facilities and Overall Credit Over-exposure
Legally, the Total Debt Servicing Ratio (TDSR) is 60%, which means only up to 60% of your gross income can go towards servicing loans. These loans may include your car loan, home loan and even credit card bills. If you’ve already maxed out your TDSR, then your IPA will not be approved. If you only have a small portion of your TDSR left, then the bank may issue you an IPA for a smaller loan amount.
Find out more about TDSR here.
Similarly, if you’re buying an HDB flat, there is the Mortgage Servicing Ratio (MSR) to take into account. This is capped by the Monetary Authority of Singapore (MAS) at 30 percent of the lender’s gross income. Banks also look at cash withdrawals from credit cards as poor credit behavior.
4. Change of Employment Status
Banks will also look at your source of income to determine your IPA. Job security is key when applying for loans. Generally speaking, stay at least 2 to 3 years with your place of employment to improve your chances of an IPA approval.
If you have just changed your job, it’s not the end of the world. The duration you’ve worked at your previous job will be taken into account and the company you have moved to will also be factored in.
5. Your Age and Working Years Left
The more years you have left before retirement age of 65, the longer-term loan you are able to secure and ostensibly, the more you can loan. So don’t wait too long before making the decision to be a homeowner. If you want to maximise your loan, this means that you’ll have to buy a new home at 30.
6. Poor Relationship with the Bank
Though unlikely, a bank might consider your previous relationship with them before deciding on your IPA. Perhaps you had a bad experience dealing with them in the past, or maybe even had a history of poor repayment conduct.
If so, these factors may influence the bank’s decision in granting you an IPA. In these cases, the banks may blacklist you, regardless of your Credit Bureau Singapore (CBS) credit score.
Don’t Despair! It’s Okay to Try Again
If you have been denied an IPA, don’t be discouraged. Take it as a wake-up call to get some of your affairs in order or perhaps manage your expectations and set your sights on something more modest (for now).
This would likely work out for the best as you wouldn’t want to be caught with an untenable liability hanging over you later on.
More FAQs About In-Principle Approval (IPA) for Home Loans
What Does In-Principle Approval (IPA) Mean?
An in-principle approval (IPA) or approval-in-principle (AIP) is a verbal communication or email from the bank, detailing how much they’re willing to lend you for a home loan.
Is Approval-in-Principle (AIP) the Same as In-Principle Approval (IPA)?
Yes, the two are different names for the same thing.
How to Get In-Principle Approval (IPA) Letter?
Usually, the in-principle approval (IPA) is shared verbally with you via your banker or broker, or is sent via email. There is usually no physical letter or statement. For the easiest way to apply for an IPA, head to PropertyGuru Finance.
And for the best information on property financing, look no further than our home financing guides.
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