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Getting An Approval In Principle Loan Is A Crucial Step When Buying A Home
It is a brainteaser that will even confuse quantum physics scientists today. Why do home hunters go about looking for a place to buy when they have no idea how much they can borrow from the bank? Isn’t it basic common sense that you need to know your budget before making any purchases? You don’t walk into a luxury mall and try to swipe your credit card for $10,000 when you know that your limit is $8,000. And you don’t go into the supermarket attempting to spend $11 and nothing more when the money voucher you have states $10. So why go around town looking for a home to buy which can costs in the hundreds of thousands when you have absolutely no idea whether the bank has your back?
Even a badly informed bystander can understand that one can lose money after committing to buy a house and later finding out his banks are avoiding his persistent phone calls and emails. More importantly, you could have spent all those days walking in the sun from house to house viewing which is the closest in resembling your dream home. And when you reach that emotional high of finally finding that home of tranquillity, you fall flat on your face as there is no money to complete the purchase. You have wasted all that time, to buy yourself the agony of getting what you want and having it taken away. The most frustrating part? You put it upon yourself.
So what is an approval in principle home loan?
It is basically an offer from a bank to lend you a certain amount of money to buy property, subject to loan to value restrictions. This is not a guaranteed loan, but it is the closest thing you get to a guaranteed mortgage. Because deeper analysis could come into play at the point of your purchase, no one can guarantee anything. For example, you could have obtained an approval in principle (AIP). But the property you bought could be a blacklisted one by the lender. This is one of the situations where a lender can still back out of an in principle approval loan. In other parts of the world, it is also called a pre-approval loan. Not to be confused with a pre-qualification where it is not an approval based on more comprehensive credit checks and analysis.
Just like beauty is not just skin-deep, and AIP is not just about how much you can borrow. There are other benefits that come with getting one. And they are not always money-motivated. You can…
1) Immediately narrow down your property search
Instead of wasting time on properties you cannot afford or on those that are cheaper but fall far short of your expectations, you can now have a clear picture of what is the price range of homes you can buy with financial backing. You can walk into a new condominium show flat with wind in your hair knowing you do not have to flinch with uncertainty when hearing about the prices of the units you are considering. What a waste of time and sanity it will be if you view a luxury apartment without knowing that it is factually out of your league. Actually it could be quite an amusing comic relief for the owners and selling agents.
By removing this embarrassing bottleneck with an AIP, you will be able to…
2) Act with confidence when you find a suitable house
Unless you have very weird taste, you are not going to be the only prospect viewing or considering a particular home. With an AIP, you will be able to make an immediate offer with full confidence on financing it. Without a loan in hand, you will be looking at delays before you even put a legitimate offer on the table. This can allow your competitors to walk in unchallenged to grab your dream home without any resistance. You have effectively become a walkover.
3) Know how to raise loan or repair credit
Some people just cannot get it into their heads that a property loan is not something they are entitled to. Anyone can get declined by the bank for any reason you can think of. By applying for a loan before you buy, you will get a heads-up should there be any issues on approving your mortgage or should there be something wrong with your credit. When these issues do occur, you have time to seek the help and advice of professionals to rectify those issues.
4) Avoid losing your deposit
At the point where you have your offer accepted by the seller, you will be required to put down a certain sum of money as a deposit or option fee. If you are unable to complete the transaction due to finances after that, you get your deposit forfeited. Surely you don’t expect anything less? Home buyers who end up in these situations are getting advice from the wrong people.
5) Plan your finances
It goes without saying that buying a house is a huge financial commitment. Not only you will have to work out how much you will pay in the long run, you also need to work out how much you have prepare for closing and all other expenses like renovations. When you know how much you should be able to borrow, you will know what price ranges of properties you can buy. With that information at hand, you will be able to work out how much cash exactly you have to prepare for closing and all other related costs that will come up.
How to get an AIP
The process of getting an AIP is the same as getting a mortgage approval with the minor absence of a real property. you will need to submit documents including those for identification and personal income verification. You will need to complete the application forms just like any mortgage. Just that in this case, whatever details you are required to provide regarding the property you are buying will be left empty. A banker or broker will be able to guide you through the filling up of the forms and the documentation to provide.
It will then go through a proper process of credit assessment and analysis by the bank’s staff. When approval is generated, you will obtain a loan-to-value approval, up to a certain figure. For example, a loan-to-value of 80% up to $800,000. This means that the bank will finance 80% of your purchase as long as the purchase price is a million dollars and below. But if you are to buy a house that costs more than a million dollars, the maximum loan quantum you will be able to obtain is capped at $800,000. Also take note that there will always be a clause within these approvals that allows the lender to use the property value as the reference price when value is lower than the transaction price.