In principle approval: The importance for homebuyers

Article summary:

• Obtaining Approval in Principle is an important step in the home buying process.
• Approval in Principle (AIP) means the bank has agreed to extend you the funds for a home loan, subject to a valuation of the property.
• The bank evaluates your credit-worthiness and determines the value of the home loan they’re willing to approve in principle.

House-buying is fun, but it does have many moving parts, especially if you need a home loan to fund the purchase. Approval in Principle is an important step in getting a home loan, and knowing what you’re in for will help you approach the process with more confidence.

What is Approval in Principle?

Once you have applied for a home loan with a bank, or through a home loan comparison service such as ooba home loans, obtaining an Approval in Principle is the next step in the process. It’s an agreement from the bank to grant you a home loan in principle, provided you meet the conditions stipulated by them.

How do I get an Approval in Principle?

Once you have applied for a home loan, your application will be processed by the bank or banks. Once they have reviewed your credit record, verified your income and are happy that you will be able to afford to pay back the monthly installments in full, they will approve you in principle. As with home loans, the criteria for Approval in Principle varies from one bank to another. So applying to multiple banks will boost your chance of obtaining it. A home loan comparison service such as ooba home loans can apply to the banks and negotiate rates on your behalf.

Upon receiving your application, the bank will:

• Evaluate your financial records, including your income and credit records. Clearing your credit record before applying for a home loan will improve your chance of obtaining Approval in Principle.
• Determine the value of the loan they are willing to offer. This is important, as they need to determine if you can afford the monthly home loan installment.
• Stipulate the terms and conditions that will need to be met for the home loan to be granted.
• If your application is approved, the bank will issue you with the necessary documentation to confirm that your application has been Approved in Principle. Hereafter, the bank will send out a valuator to the property, to ensure there is enough value in the property to secure the loan amount approved in principle. If the bank is happy with this, they will grant you the home loan.
• You can then accept the granted home loan, reject the offer, or negotiate further on the terms and conditions of the loan, where possible.

The process of obtaining Approval in Principle usually takes about two to three working days. (source)

What if the bank refuses to approve me in principle?

That would be unfortunate, however, it’s worth mentioning again that lending criteria vary from one bank to another; so while one bank may reject your application, another may approve it.

Does an Approval in Principle guarantee me a home loan?

The bank can still pull out of the agreement if you don’t comply with the terms and conditions, or if the property is of lower value than the loan amount that you applied for. This would mean the bank would not be able to recover the value of their loan should you not be able to make monthly payments, and they are forced to sell the property to recover their outstanding loan amount. The bank could also withdraw their Approval in Principle if the property is in a very poor condition of repair and is therefore unsuitable security for the loan.

For the most part though, the Approval in Principle is as close as you can get to a guarantee.

Bear in mind that an Approval in Principle differs from prequalification. A prequalification simply confirms that, based on your financial records, you would qualify for a home loan; whereas Approval in Principle means the bank has actually approved your home loan, subject to a satisfactory property valuation and perhaps one or two other conditions that you have to meet.

You can get prequalified with ooba home loans, South Africa’s largest home loan comparison service, who also offer a range of tools that make the home-buying process easier. Start with their home loan calculators; then use their free, online prequalification tool, the ooba Bond Indicator, to determine what you can afford.

Finally, when you do feel ready to apply for a home loan, ooba home loans can submit the application to multiple banks on your behalf, boosting your chance of obtaining bond approval.