A pre-approved loan is an in-principle approval given to you by a bank 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.
In this post, we list the six most common pre-approved home loan myths. We’ve debunked them for you so that you can go into the loan market feeling informed.
Pre-qualified is the same as getting pre-approved
While these terms may sound familiar, there is a world of difference between them. Any financial institution can make you pre-qualified for a home loan after assessing your financial position. However, for getting pre-approved, you need to apply through an application form. You will also have to pay a processing fee.
You would surely get the loan
This is one of the biggest myths. Once you apply for a pre-approved home loan, the bank will check your eligibility. Additionally, once you have finalised a property, it will be assessed by the lending institution. For instance, if you have finalised a property worth Rs 60 Lakh and have applied for similar amount loan, the bank would not approve it. Why? Well, similar to a regular home loan, in pre-approved home loan also, banks can lend only 90% of the property value for loans of up to Rs 20 Lakh. For loan amount between Rs 20-75 Lakh, the loan to value is 80%; while for a loan amount of more than Rs 75 Lakh, it is 75%.
Further, if the bank finds some issues with the title of the property, it can refuse to sanction the loan amount.
You have to take the loan once it is pre-approved
Not really!
There are good percentage chances that despite having a pre-approved loan, you are not able to finalise a property. So, what happens in such a scenario? Well, a pre-approved loan 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.
The processing fee is refundable if the loan is not availed
Banks usually charge a processing fee for a pre-approved home loan, which is refunded if the loan is taken. This amount can range from anywhere between Rs 1000-5000, depending upon the loan amount. This fee is not refunded in case the loan is not availed.
Interest rates are the same as regular home loans
In most of the cases, pre-approved loans come at a floating rate of interest. So, if the interest rates dip, you get no benefit at all. Thus, think twice if you wish to avail a home loan at a fixed rate.
No impact on credit score
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 continuously apply for a pre-approved loan and never avail it, it reflects poorly on your credit score.
So, are there any advantages?
Yes, better financial planning is the most significant 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
