In-principle approval for loans: What's the difference with actual approvals?

In-principle approval — a conditional approval — gives consumers a better sense of their application’s eventual outcome without having to put in too much time and effort into their application for financial products like credit cards, loans, credit lines and debt consolidation plans. 

A simple form that applicants fill out typically asks for their name, address, date of birth, job status and income. If everything checks out against the bank’s own established metrics for that particular financial product, the bank is likely to grant in-principle approval. 

On the banks’ end, in-principle approval functions as a way for them to weed out unsuitable candidates without having to spend too much time on such applications that don’t meet the eligibility requirements set.   

In-principle approval vs actual approval

The main difference between in-principle approval and actual approval is that you may or may not get approved in the end for the financial product(s) you apply for, such as credit cards, car loans, home loans and credit lines. 

Your actual approval very much depends on the bank’s further assessment of your financial health and credit-worthiness, taking into account your existing debt obligations, income and age. It is the bank’s responsibility to dig deeper into your credit report to find out if you’ve omitted certain information from your application.

Oftentimes, applicants who miss the mark for in-principle approval need to furnish additional documents that would give the bank greater confidence in said applicants’ ability to repay the amount they are hoping to borrow. 

Some applicants are denied in-principle approval simply because of their bad credit history or extensive existing debt obligations — banks just don’t feel confident in extending the requested loan amount to these individuals. In such cases, the bank may flat out reject them or offer an indication of the maximum amount they could possibly loan them.

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Types of financial products that usually come with in-principle approval

Credit cards, credit lines, debt consolidation plans and renovation loans typically come with in-principle approval. For the most part, in-principle approval is interchangeable with the term ‘instant approval’ for these financial products. 

But when it comes to car loans and home loans, in-principle approval plays a more prominent role: it lets you know how much you can actually borrow from the bank in the early stages of your application. Borrowers have to apply to get an in-principle approval for such loans. 

Having a gist of how much you can borrow from the bank should help you budget for your car or home — an all-important step to understanding what you can comfortably afford so you don’t go around shopping for cars or homes that are way beyond your budget. 

In the following section, we’ll focus on in-principle approval for home loans as there are higher stakes involved. 

In-principle approval for home loans

Getting an in-principle approval for one’s home loan is an oft-neglected step by home buyers, likely due to the lack of awareness. An in-principle approval here refers to an agreement between you and the bank that you intend to borrow from. It is usually valid for 30 days. 

While an in-principle approval doesn’t necessarily provide you with the money you want to borrow straightaway nor is it legally binding, it is a form of assurance from the bank you wish to borrow from. 

If you decide to go ahead with your property purchase, the bank will extend the home loan to you – up to a specific amount and tenure the bank deems fit after evaluating the following:

1. Your financial health and credit history 
2. The value of the property you plan to buy 
3. Whether your TDSR, LTV and MSR are compliant with regulations

Reasons why an in-principle approval is particularly important for prospective home buyers

1. Plan your finances better

With an in-principle approval, you’ll have a more concrete idea of how much money you have, how much you need to borrow and how much you can potentially borrow from the bank. 

Knowing all these figures at the back of your hand will allow you to plan your finances better than if you were to just do a rough gauge on your end.

2. Streamline your property search so it’s more efficient

Considering how many properties there are on the market, an in-principle approval lets you weed out those that you cannot afford. Knowing your home loan eligibility makes your property search much more efficient as you will logically focus only on properties that you can afford. 

3. Safeguard your option fee

This is the most important reason why you shouldn’t neglect getting an in-principle approval for your home loan: prevent yourself from forfeiting the option fee that can range from a few thousand dollars to tens of thousands of dollars. 

Although most people do not back out of their property transaction after they’ve paid their non-refundable option fee and obtained their Option to Purchase (OTP), some people have had no choice but to do that due to their inability to secure the actual loan amount required for the property purchase. 

Getting an in-principle approval first means you’ll know right from the start if you can very well afford the property you’re interested in purchasing –or not.

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4. Boost your negotiation power with sellers

Like it or not, having knowledge on the maximum amount that you will be able to pay for a property puts you in a better position to bargain effectively with sellers. Sellers will also be more inclined to take you as well as your price negotiations with them more seriously with an in-principle approval letter on hand. 

5. Quicker loan disbursement process

The bank you got your in-principle approval from already completed most of the initial verification when you applied for the in-principle approval. When you proceed to obtain the home loan from the same bank, they have fewer additional documents to go through before giving you the final approval. 

This essentially makes the loan disbursement process quicker — super useful for when the property you’re looking to purchase has a time limit attached to its transaction.

Bottomline

Even though an in-principle approval doesn’t automatically translate to an actual approval, it gives applicants a clearer idea whether or not they are deemed suitable by the banks to have the capacity to be responsible for the financial product(s) they’ve applied for.  

In the context of home loans, getting an in-principle approval ahead of time when you’re serious about your property search can help you avoid headaches and money losses further down the road! 

Word has it that property agents prefer working with buyers with in-principle approval for their home loan — an in-principle approval signals some level of seriousness on your part as a potential buyer and that greatly reduces the risk of them doing a whole lot of work for nothing.