When Applying For A Home Loan: What Does Approval In Principle Mean?

Buying a home can be a stressful process, particularly in a competitive market where you need to move quickly or run the risk of losing out on buying the property of your dreams. Being given an 'approval in principle' from a financial institution can play a significant role in moving ahead with the property agreement contract.

What does approval in principle mean?

Also referred to as a quotation, an approval in principle is an indication of the loan a bank is willing to offer an individual. Once a buyer receives this information from the bank, he or she should let the relevant estate agent and conveyancing attorneys know as this will be a clear indication that the buyer has the ability to obtain the necessary bond and guarantees in order to proceed with the property purchase.

The deciding factors

Determining whether to offer an approval in principle as well as the value for which this will be offered, a financial institution will consider a number of factors. The exact criteria may vary from bank to bank, and therefore it is always advisable for a buyer to talk to the relevant bank directly to ascertain what these criteria are.
In broad terms, the bank will be assessing whether the buyer will be able to afford the loan, and the repayments necessary to pay this back as agreed. As such, factors such as the buyer's income will be taken into account, as well as all other existing financial obligations and credit records.

The steps in securing the loan

In order for the approval in principle to constitute a bond approval, the buyer must accept all the terms of the approval in principle. Once an Agreement of Sale is in place on a property, the bank will perform a valuation and will issue the buyer with a letter of final bond grant. The bank's bond attorneys will be instructed to proceed with issuing guarantees and registering of a bond in their favour.

Once confirmed, the property sale and transfer process can proceed provided all other conditions relating to the contract of sale are met.