How about the idea of getting a home loan approved even before you have finalised the property? But is this free of all hassles? Are there any reasons for not opting for one?
Imagine yourself wanting to buy your dream home. You zero in the property and apply for a home loan. Now, what happens if the property you choose for yourself gets sold off to someone else by the time your loan gets approved? Or, what if your loan application gets rejected? This is where pre-approved loan comes into picture.
Often you would have got calls from banks, trying to convince you to take a pre-approved loan with lower rate of interest, minimum documentation and faster processing, typically ones like 48 hours.
A pre-approved loan is essentially an in-principle approval given to you by a bank/financing institution on basis of your profile. The factors that the bank looks at when judging your EMI (equated monthly instalment) paying capacity include your income status, the current EMI outflow, your payback history and your net-worth. The bank then approves of a certain amount that you can avail as home loan, within a certain time period, usually six months.
Although it sounds great to have a loan approval letter on your palm even before you finalise the property you wish to buy, there are glitches you need to look out for-there are matters you really need to give a thought to before deciding whether to avail it or not.
A pre-approved loan is not guaranteed. Banks have the final discretion on whether or not to disburse the approved amount. For example, you select a property of your choice and the bank does not lend for properties of that area your house falls in, the bank has all the right to reject the final application on that basis.
Although the bank claims to have ‘approved’ the loan, the interest rates and other important terms and conditions are still at sea—they are ‘indicative’. You won’t know how much you require paying back and within what time frame. Some banks do work out a few terms and conditions at the time of pre-approval, but with a “subject to change at discretion of the bank” clause. Besides that, all documents related to loans need to be submitted again at the time of disbursal, without which banks have been known to reject the pre-approved loan. This effectively leads to an additional documentation burden on you.
A fact that you require to take into consideration is the amount that has been pre-approved versus the amount you actually require once you chose the property. If the final amount is higher, you require making a higher down payment since you have a limited chance to negotiate with the bank now-your budget could go haywire.
Another factor you require to keep in mind is the type and amount of indicative interest rates mentioned on the letter. These rates are usually floating. In case you wish to take a loan at fixed rate of interest, pre-approved loan isn’t for you.
The costs involved in a pre-approved loan are never refundable. The processing fee involved is levied irrespective of whether you finally avail the loan or not. Loans are valid for a specific time frame—if you do not put up the ‘disbursal’ application within that specific period, the pre-approval gets null and void and you require to apply all over again the next time, and the fee involved will be levied again.
Last but not the least; your credit gets blocked to the extent of amount you have taken the pre-approval for. If during the period that your pre-approved loan is valid for, you require a personal or an education loan, your payback capacity will be calculated taking into consideration the pre-approved loan. In addition to that, if you have put up a pre-approval application numerous times, you get tagged as someone constantly looking out for credit, and that reduces your credit score.
You should go in for a pre-approved loan only once you have shortlisted the property of your choice. A pre-approved loan does make the process faster. Another added advantage if that you can negotiate with your builder on the basis of funds you already have in your pocket, the builder may bring down prices for you, who has ready cash to pay instead of someone who still has to raise it.