Imagine this.
Thinking about buying a home? You, as the prospective homebuyer, will first shortlist your home. Then comes the seemingly never-ending task of finalising the property. And finally, the documentation before closing with your application for a home loan.
That’s about the typical timeline for buying a home.
How about reversing this process? Confused? We are talking about the pre-approved home loan. But is it worth it? Are there any downsides to obtaining a pre-approved home loan? We answer all this and much more in this post.
Remember Anitha Nair whose home loan application was rejected because of her poor credit score? After three months, when she got the loan approved, the property she had finalised was already sold. She was unlucky, but you need not be. This is where pre-approved home loans can come into play.
Understanding pre-approved loans
You would have come across advertisements on bank sites offering pre-approved loans at lower interest rates, low processing charges, no prepayment charges, and much more. So, how does it work?
A pre-approved loan is, essentially, an in-principle approval given to you by a bank just based on your credit profile. The factors taken into consideration include:
- Your income
- Current EMIs, if any
- Past payment history
Based on these factors, the bank approves a certain amount that you can avail as a home loan. This loan, however, should be availed within a stipulated time, which is usually six months.
If you do not submit the disbursal application within this time, the pre-approval gets null and void.
Mismatch in the amount approved and the amount required
If the amount approved is higher, then you will have to make a higher down payment since you have a limited scope of negotiation with the bank to rework on the amount.
The fixed or floating interest rate conundrum
In most of the cases, pre-approved loans come at a floating rate of interest. Thus, think twice if you wish to avail a home loan at a fixed rate.
(Read More: Fixed Rate or Floating Rate? Find the Right Home Loan Interest Rate)
The biggest advantage
Better financial planning is the biggest advantage of pre-approved home loans. Once you have the amount approved, you can be sure about the budget for buying a home. Thus, we recommend opting for pre-approved loans if:
- You have at least shortlisted the property, if not finalised
- If you can negotiate with the builder to get a better price since your funds are almost ready
How to apply?
The procedure to apply for a pre-approved loan is similar to a regular home loan. The only difference is that you need to mention in the application that the “property is not identified.”
The documents required for the salaried individual are:
Some points to remember
- You can avail pre-approved loans only at a floating interest rate.
- Your credit balance becomes low when you apply for a pre-approved loan. For instance, your credit limit is Rs 80 Lakh, and you have availed a pre-approved loan of Rs 70 Lakh. Now, if you apply for a personal or education loan for Rs 15 Lakh, it will be rejected.
- Lastly, if you constantly apply for a pre-approved loan and never avail it, it reflects bad on your credit score.
Debunking some myths
Myth 1: There is guaranty for pre-approved loans.
Fact: This is one of the biggest myths. If the bank finds some issues with the title of the property, it can refuse to sanction the loan amount.
Myth 2: The processing fees are refundable if the loan is not availed.
Fact: This is a fee charged to process the home loan application. Thus, it is not refundable even if you don’t avail the loan within the stipulated time.
Myth 3: 100% of the sanctioned amount can be availed.
Fact: The RBI guidelines clearly state that the banks can only lend 80-90% of the property value depending upon the loan amount. This stands true even if you have a pre-approved home loan.