Home Loan Guide – Approval In Principal and Valuation Check before you buy the property
Traditionally, buyer would pay the 1% option fee to the seller and bring the Option To Purchase (OTP) to the bank and apply for the loan. There is no assurance that the housing loan will be approved. On top of that, buyer might be overpaying the seller on the property price.
Therefore, there are 2 very important steps to do before purchasing any property.
Approval In Principal (AIP)
AIP is the process of getting your loan approved before you buy any property. You do not need to identify any property or provide any property details to the bank at this point. The bank will proceed to do the necessary credit check and income checks to ensure that they are able to support you with the loan amount you need.
In order to do the AIP, buyer will need to furnish the bank with his income documents, NRIC or passport and also application form declare current liability if any. AIP helps to protect buyer from paying the OTP and end up unable to secure a loan to finance the property. The buyer may end up losing the 1% or 1.25% (25% of 5% deposit).
The seller wants to sell the property as high as possible, the buyer want to buy as low as possible. Thus, who to give a fair value? Definitely not the housing agent! Since you need to take a loan from the bank, let the bank give you an indicative figure on how much the valuation the property is before you buy. And Yes, the banks do provide indicative valuation for properties (Residential and Commercial). This helps to protect the buyer from buying the property above valuation.
Take note that the difference of the purchase price and valuation must be paid by cash.
Property valuation 1m
Purchase price 1.08m
Cash needed to purchase property:
1st 5% = 50k (5% of purchase price)
Cash above valuation = 80k
Total = $130k
If client purchase the property at valuation price of 1m, the cash needed is only
1st 5% = 50k
Total = $50k
Always check the valuation with the banks. In some occasion, property agent might be able to show the buyer a recent valuation report to support their selling price. However, the valuation company might not be in the panel of the bank. Thus, valuation given by the bank may be a different amount.