Bank Loan Essentials: In-Principle Approval (IPA/AIP)

When purchasing a property in Singapore, many homebuyers choose to apply for a housing loan from banks, especially considering that the interest rates offered by banks in Singapore are relatively low. In the loan process, the IPA (In-Principle Approval) plays a very important role. This article explains the IPA in detail, helping you better understand and prepare for the loan process.

What is IPA?

IPA is a document issued by the bank after an initial assessment of the homebuyer. It indicates that the bank, in principle, agrees to provide the homebuyer with a certain loan amount. However, it should be made clear that the IPA is not a formal legal document; it is just an indication of the bank's intention. This means that although the homebuyer has obtained the IPA, in the subsequent property purchase process, they still need to meet other requirements set by the bank and complete a series of procedures before the loan is finalized.

Once the homebuyer obtains the IPA and decides to take out a loan from the bank, they need to go through further procedures and then sign a Letter of Offer (LO) with the bank. This is the formal loan agreement. The LO will list all important information, such as the loan amount, interest rate, and loan lock-in period, etc. After the loan agreement takes effect, the bank will disburse the loan, and the homebuyer will start to make monthly repayments.

The following points need to be noted regarding IPA:
• Validity Period: Generally speaking, the validity period of the IPA ranges from 2 weeks to 1 month. Homebuyers need to start handling the subsequent loan procedures within the validity period; otherwise, the IPA may expire.
• Effectiveness: The IPA is not the final loan approval but only an indicative approval. When formally applying for the loan, the bank may conduct another review based on the latest policies and the actual situation of the homebuyer at that time.
• Fees: Applying for the IPA usually does not require additional fees.

What is the Use of IPA?

▲ Determine Whether You Can Get a Loan: Otherwise, if after paying the Option Fee (equivalent to a deposit, 1% for second-hand properties and 5% for new properties), you find that you are ineligible for a loan or the loan amount is insufficient and you cannot continue with the property purchase, the seller can confiscate this part of the deposit and will not refund it.

▲ Determine the Loan Amount: The IPA can clarify the loan amount that the homebuyer can obtain from the bank, helping the homebuyer set a reasonable property purchase budget, narrow down the range of property search, and improve the efficiency of finding a property.

▲ Save Time: In the process of purchasing a property, the IPA can greatly save the communication and approval time between the homebuyer and the bank, which is especially useful in urgent property purchase situations.

▲ Boost Confidence in Price Negotiation: With the IPA, the homebuyer can negotiate with the seller more confidently because they already know their loan capacity.

How to Apply for IPA?

Select the Intended Lending Banks
Compare the loan schemes offered by multiple banks and select 1 - 2 banks as alternatives.

Contact Bank Loan Officers
Get in touch with loan officers from the selected banks to understand their loan policies and required materials.

Submit Required Assessment Materials
The materials required for applying for the IPA are generally similar to those for applying for a standard housing loan. The common materials include:

• Original and photocopied copies of identity documents (NRIC)
• Recent salary slips (for the past 3 months)
• Recent personal income tax statements (NOA) (for the past 2 years)
• The latest statement of the Ordinary Account of the Central Provident Fund (CPF)
• The recent statement verifying whether you own a HDB flat under your name

Wait for Bank Approval
The bank will review the submitted materials and comprehensively assess the homebuyer's income, job, age, assets, credit record, etc., and then give a loan amount and applicable loan schemes. The IPA approval process may take 7 - 30 days, depending specifically on whether the materials submitted by the homebuyer are timely, complete, and accurate.

IPA Amount

The loan amount you can obtain is influenced by multiple factors, mainly including:

Total Debt Servicing Ratio，TDSR

This indicator applies to the purchase of all types of residential properties. The Total Debt Servicing Ratio stipulates that only 55% of the borrower's total monthly income can be used to repay debts, including housing loans, car loans, credit card debts, and other personal loans. If the homebuyer has other outstanding loans, these debts will take up the 55% share of the income, thus affecting the amount of the housing loan.

For example, if your monthly income is $10,000，the maximum amount you can use to repay various debts each month is $10,000 × 55% =$5,500. If you also have a car loan of $2,000 and a credit card debt of $1,000 to repay each month, then the amount available for repaying the housing loan will only be $5,500 - $2,000 - $1,000 =$2,500. The bank will limit your housing loan amount accordingly.

Mortgage Servicing Ratio，MSR

This indicator only applies to the purchase of HDB flats and Executive Condominiums (EC).
The Mortgage Servicing Ratio (MSR) refers to the proportion of the borrower's total monthly income used to repay the housing loan. Currently, the upper limit of the Mortgage Servicing Ratio is 30%. For example, if your monthly income is $10,000, you can only use $3,000 of it to repay the housing loan at most.

TDSR and MSR considers different financial factors. TDSR considers all the borrower's outstanding debts, including housing, car, education, credit card loans, etc. In contrast, MSR is simpler as it is calculated only based on the borrower's monthly income. For borrowers purchasing HDB or EC units, MSR will be used for the initial assessment first to calculate the maximum amount they can repay each month. After that, a second round of assessment will be conducted on the buyers to consider whether all their debts to be repaid are within the TDSR limit. If the borrower has outstanding debts (such as a car loan), it may affect their borrowing amount, and they may not be able to obtain the maximum MSR loan amount.

In conclusion, the IPA plays an important role in the process of purchasing a property with a bank loan in Singapore. Homebuyers should acquire relevant knowledge, plan effectively, and prepare adequately to facilitate a smoother loan and property purchase process.

For more questions related to bank housing loans, such as loan eligibility, processing procedures, interest rates, etc., you can check the articles on Housebell:

Singapore House Purchase: A Guide to Bank Loans