How can taking out a home loan possibly be any more painful that it is now? Thanks to MAS property financing regulations and stricter limits on borrowing, the home loan process is a lot like trying to outrun a huge boulder, Raiders of the Lost Ark-style – except the boulder is made out of paperwork you need to fill out.
But that’s nothing compared to financial pain you’ll feel if you make some general (but preventable) home loan mistakes. I’m not talking about silly typo mishaps on your loan documents, but errors that can not only get your application rejected, but cost you tens of thousands of dollars!
Here are three home loan mistakes you should avoid at all cost:
1. Failing to Get an In-Principle Approval (IPA)
Trying to buy a home without getting an In-Principle Approval (IPA) from the banks first is a very risky financial move. Why? Because you need an IPA from the banks to find out A) if they’ll give you a home loan, and B) how much they’ll agree to lend to you.
In short, it’s a bank’s guarantee that it will loan you a fixed amount to buy a home.
But what happens if you reach an agreement with a seller and pay the option fee only to find out that the banks either won’t lend to you or will lend you less than what you need?
You can kiss that option fee goodbye because it’s forfeited unless you find a bank to loan you the money to buy it within a 14 – 30 day period (varies).
To put things into perspective, here’s how much you stand to lose from this “little” mistake:
- If you’re buying an Executive Condominium (EC) or Design, Build and Sell Scheme (DBSS) flat, your booking fee will be 5%-10% of the property’s purchase price. For a “moderately” priced property worth $500,000, that means you stand to lose $25,000-$50,000.
- If you’re buying a resale HDB flat or landed property, your booking fee will be 1% of the property’s purchase price. For a “moderately” priced HDB worth $500,000, that means you stand to lose $5,000.
Remember, foregoing an IPA is comparable to using whatever you’ve set aside for your booking fee at the MBS casino. Because that’s exactly what you’re doing – gambling with your hard earned money.
2. Taking Out Another Loan or Racking Up Credit Card Debt
Because of stricter borrowing regulations such as the Total Debt Servicing Ratio (TDSR) framework, you now have to run past a gauntlet of borrowing restrictions meant to smack down prospective buyers who try to buy property beyond their financial means.
The TDSR in particular makes it tougher to take out a home loan, because banks will not let lend to you if your outstanding debt takes up more than 60% of your income. The TSDR has a huge impact on your home loan application because MAS isn’t choosy about what “kind” of debt you carry.
This means that the banks will factor all of your outstanding debt, including:
- Your Student Loan(s)
- Your Personal Loan(s)
- Your Car Loan(s)
- Your Credit Card Debt(s)
So you see, applying for loans or carrying large credit card balances (or worse, using a credit card or loan to make your down payment) at the same time you’re trying to get a home loan will only sabotage your chances of getting it approved.
Because all you’re doing is inflating your TDSR percentage, jeopardizing your chances of a bank approving your home loan application. Instead, if you’re going to make a big purchase using loans or credit, wait until after you’ve purchased your property.
3. Not Comparing Home Loan Packages
After going through the process of getting your IPA and having your home loan application approved, you’ll feel like you just completed the quest for the Holy Grail – especially after all of the document digging and signing you had to do.
But you shouldn’t let complacency over just getting a “decent” home loan package keep you from saving even more money. Because even a home loan package that’s .5% lower can save you thousands over the loan’s tenure.
Of course, there’s just one problem. You’ll need to spend even more time contacting most of Singapore’s major banks to see what home loan packages they’re offering.
Yeah, you could take that route if you enjoy stress – or you can just save time and hassle by using a transparent home loan comparison site like MoneySmart.sg to find a much better deal and get them to apply for the loan for you.
Do you have a bad home loan story to tell? Share your thoughts with us on Facebook!
peter_schluter2002, rfktech9, Warriners2011