What is In-Principle approval for home loan and why you should get it before making an offer to purchase a property

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Buying a property can be both an exciting but stressful experience.

On one hand, viewing properties and visualising how you can transform each property into your dream home can be almost as fun as living in it.

At the same time, buying a property is a complex process that comes with long-term financial commitment.

You need to ensure you can gauge how much you can afford in order to make the right offer. This can be stressful, especially if it's the first time you are buying a property.

Whether you are buying a resale condominium or a brand new private property, purchasing a property means needing to pay to obtain an Option to Purchase (OTP) first. Think of this as similar to a non-refundable booking fee.

The option fees that you pay is dependent on the property value, which can range from 1 per cent (private resale properties) to 5 per cent for (new properties).

Why do buyers forfeit their option fees?

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In general, most buyers do not back out of a property transaction because they are indecisive or have changed their minds.

Rather, when buyers pay the option fee, they are likely certain that they want to buy the property.

The reason why some property owners end up forfeiting their OTP is likely because they made a hasty purchase decision, only to realise later that they can't actually afford the property.

You see, it isn't good enough to be comfortable with the purchase price.

To afford a property, you need to have enough money to pay the minimum downpayment required, and be able to secure the loan amount required.

For the downpayment, buyers need to be able to pay at least 25 per cent of the purchase price.

If you want to buy a condominium unit for $1 million, you need to have at least $250,000 in cash or CPF - and at least 5 per cent ($50,000) has to be paid using cash.

How much can you borrow?

The second requirement is trickier. Unless you are paying for the property in full, you will need a bank loan. Whether you can secure this loan amount isn't entirely up to you.

The banks that you apply to borrow from will need to assess your creditworthiness using factors such as your salary, age and how much debt you currently have.

You will also need to meet the borrowing requirements as prescribed by the regulators. These include the Total Debt Servicing Ratio (TDSR) and the Mortgage Servicing Ratio (MSR).

Schemes What It Is Borrowing Limits
Total Debt Servicing Ratio (TDSR) TDSR takes into consideration all other loan obligations that you have. These include property-related loans, car loans and student loans TDSR is set at a maximum of 60%. No more than 60% of your monthly income can go towards repaying all loans.
Mortgage Servicing Ratio (MSR) In addition to the TDSR, buyers of HDB flats and executive condominiums bought directly from developers must also meet the MSR requirement MSR is set at a maximum of 30%. No more than 30% of your monthly income can go towards repaying property loans.

Get an In-Principle loan approval first

To guard yourself against the risk that you may end up losing your option fee because you are unable to secure the loan required, it's always prudent to get an In-Principle Approval first, before you make any formal offer.

An In-Principle Approval is an agreement between you and the bank that you intend to borrow from.

This agreement consists of two main details.

- The amount and loan period the bank is willing to lend you

- How long this IPA is valid for

An In-Principle Approval doesn't automatically give you the money that you want to borrow, nor is it a confirmation that you are going to take the loan.

Rather, it provides you with the assurance that if you do proceed to purchase a property, the bank that you already have an In-Principle Approval from will give you the loan.

Getting an In-Principle Approval doesn't just protect you against the risk that you may lose your option fee; it also gives you certainty on what you can afford.

For example, if you know that the bank will be willing to give you a loan of $900,000 and that you have $300,000 in cash and CPF, then you know that the maximum amount you can afford for a property is $1.2 million.

With this budget in mind, you can have a clear plan on what you can afford and more efficiently look for properties that are within your budget.

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With DBS, securing an In-Principle Approval can be done quickly from the comfort of your home.

In just 10 minutes, you can submit an online In-Principle Approval application through DBS, giving you a clear idea of how much you can borrow for your property purchase.

Besides helping you secure an In-Principle Approval for your home loan, the DBS Property Marketplace is also a useful one-stop portal that can help potential buyers calculate how much they can afford, and search for the right properties that fit their budget.

You can start by choosing one of the four budgeting options available - Property Price; Monthly Instalment; Downpayment or Maximum Loan Amount.

This is a start point and through the inputs that you provide for the guided planning tool, you will know how much you can spend on a property as it takes into consideration your personalised inputs, such as your current income, age and other debts that you have.

Best of all, you get an affordability report that you can save, retrieve and edit anytime you want.

So, if your financial circumstances change, you can adjust your inputs by logging in to your DBS marketplace account with your digibanklogin ID to find out your new affordability level.

The report tells you the main details that you need to know when buying a property, such as the minimum downpayment and loan amount you can borrow.

PHOTO: DBS Property Marketplace

Regardless of where you are in your property buying journey, it doesn’t hurt to know your budget first.

So start calculating your affordability level and get your home loan In-Principle Approval first through the DBS Property Marketplace today.

This article was first published in Dollars and Sense.