Imagine you have finally selected your dream house to purchase. You reach a lender only to find out that you are not eligible for the amount which you need to buy that house and so your home loan application got rejected. Or imagine another situation where loan process took such a long time that the property was sold to someone else. Such are the nightmare of every potential home loan borrower. To eliminate these situations, a new way of lending has come to the picture which we call ‘Pre-approved home loans’.
What is a Pre-approved Home Loan?
In the simplest way, we can define pre-approved home loans as- an in-principal approval given by the bank even before you have selected the property which you are going to purchase. In this type of home loan, the lending institute gauges the repayment capacity of the borrower and on the basis of this, the home loan principal amount is defined. Once the pre-approval is given to the borrower, he/she can avail the loan within 6 months.
A home loan process actually consist of two sections. The first section is when the lender verifies the creditworthiness of the applicant. Any lender checks the monthly income, FOIR, credit score, previous repayment history, net worth etc of the applicant to find out the eligibility of the applicant. When the first section of the loan process is completed successfully, the second section starts with the property verification. In a pre-approved home loan, the first step of the loan is done and a pre-approval letter is given to the applicant. Hence when the applicant selects the property, the loan will be disbursed sooner than the general home loans.
Facts You must Know about Pre-approved Home Loans
Though one may be tempted to know that one can get a home loan in an easier way, there are some facts which one must know before going for the same.
#Fact No 1
Pre-approved home loans are not certain to be disbursed
Yes! it may be shocking but true that though you have the pre-approval letter in your palm still the loan is not disbursed. This may happen if the property you have selected got some legal issues. If the legal title is not cleared or some govt approvals are not in place then the bank may refuse to disburse the loan. The approval of the loan is just the first step of the loan, not the entire process.
# Fact No 2
Works only with floating interest rate
A pre approved home loans mention indicative interest rates on the letter. Such interest rates are generally floating. Hence the interest rate on the particular home loan will be the rate which is applicable on the day of disbursal. So, if an applicant is wishes to go for a fixed interest rate then pre approved loans will not work for him.
#Fact No 3
One can not avail 100% of the property value as loan
As per RBI guideline, no lenders can lend a home loan either pre-approved or general home loan which is 100% value of the property. RBI has made it mandatory for the lenders to lend only up to 90% of the property below INR 2 million and 80% above INR 2 million.
#Fact No 4
The loan must be disbursed within a fixed time frame
A pre-approval of home loan is valid only for next 6 months. One must make the loan disbursed within 6 months. If you don’t purchase a property within this time frame, the approval will gets null and void and you require to apply all over again the next time.
Features and Benefits of Pre-approved Home Loans
A pre-approved home loan has some features which make it appealing to the loan seekers. Let’s understand why home buyers tend to go for a pre-approved home loan.
Better Financial Planning: A pre-approved home loan makes the home buyer plan their finances accordingly. When a person knows his borrowing capacity, he can search for a home within that range itself. Unaware of the eligibility, one may invest their time and effort in the properties which don’t match his eligibility.
Faster Processing: As mentioned above, in a pre-approved loan the first section of the loan procedure which is the borrower verification is done in advance. So, once the applicant selects the property, the lender only just has to verify the property. So the loan can be disbursed comparatively faster than the general home loan.
Better Negotiating Power:Having a pre-approved home loan sanctioning letter on the palm, the applicant gets a better negotiating power with the builder. As the builder considers such customers as the most genuine ones, they are likely to offer some discount on the total deal.
Saves from Future Shock: It is possibly the worst feeling when you can not have your dream home just because your home loan application is not granted. In such condition, you can not even go to the next lender very soon as it may affect adversely in your credit score. A pre-approved home loan saves a person from such shocks as if there are no issues with the property, getting the loan become as simple as ABC.
Disadvantages of Pre-approved Home Loans
Along with advantages, there are some disadvantages as well, which one must keep in consideration before going for it.
Interest Rate: The home loan interest rate on a pre-approved home loan sometimes has a positive effect and some time affects negatively. The interest rate on a pre-approved home loan is locked on the day of approval. Whatever the rate of interest may be on the day of disbursal, it won’t have any impression on the pre-approved home loan. In the case of a falling interest rate, one still has to pay the interest rate which was applicable on the day of approval. Hence he has to pay a higher interest rate.
Processing Fee: While going for a pre-approved home loan, one has to pay the processing fee of the loan which is non-refundable. So if it happens that for some reasons you have dropped the plan of buying a home now, you can close the deal by raising an application but that will not help you to reimburse the processing fee.
Psychological Pressure: Once a pre-approved loan is sanctioned, one has to make the loan disbursed within 6 months in general. So within 6 months if you are unable to close the deal by make the loan amount disbursed, you will need to renew the approval for which you have to pay the processing fee once again. So it creates a kind of psychological pressure on the home buyer. Buying a home is a lifetime decision. So such important decisions should never be taken under any kind of pressure.
Redeposit Documents: While applying for a pre-approved one has to deposit all the needful home loan document. But once you select the property and reached your lender for the loan to disburse, your lender may ask you to redeposit the same documents once again. Redepositing the same documents again and again may make the whole process feel like a complicated one.
The Bottom Line
Many home loan experts consider per approved home loans as the best option as this is the least risky way to buy a home with a home loan. The best part of such type of loan is that a person becomes aware of his Home Loan Eligibility. But if the same deal cannot be completed within the pre-fixed time, all the time, effort and money invested in pre-approving the loan go in vain. So one must understand both sides of the same well in advance. It is better to apply for a pre-approved home loan only if you are certain to buy a home within next six months.
