Owning a home is one of the most crucial decisions that you have to make in your lifetime. However, unless you have unlimited funds at your disposal, there is no other option but to take a home loan, to fund your dream. Housing finance companies as well as Banks, offer pre-approved home loans much before the borrower finalizes a property. Banks evaluate the borrower’s finance and also the property documents while sanctioning home loans and this can take up a lot of time. With pre-approved home loans, the approval process is faster and easier.
Overview:
If you look at all the things that can go wrong when you are looking to buy a home for yourself, you will be terrified. Imagine losing the property of your choice if your loan is delayed or if your loan application gets rejected. You can avoid all this stress if you are eligible for a pre-approved home loan.
Pre-approved loans are attractive since it comes with unique features such as lower interest rates, very little documentation and quick processing, usually within 48 hours. A pre-approved loan is actually an in-principle sanction offered to you by a bank/financing institution on the basis of your credit score and financial stability. The factors that determine loan repaying capacity based on which the bank judges the borrower’s EMI, include: the individual’s income status, payback history, current EMI outflow and the net-worth. The bank then approves a particular amount that you can avail as home loan, within a fixed time period, which is usually 6 months.
Most banks offer pre-approved home loans facility to both its existing customers as well as new customers. After verifying the financials, the bank evaluates the pre-approval application and sanctions a loan which is valid for a definite period. The customer can avail the loan during this period, but only after submitting the relevant property documents required for due diligence check and verification.
You should take a pre-approved loan only if you have finalized the property of your choice. A pre-approved loan makes the process of availing loan and making the purchase, quick and hassle-free. Another added advantage is that your credibility to the builder increases and hence you can negotiate the prices since you also have readily accessible funds to make the purchase, as compared to someone who will have to raise it.
Features of Pre-Approved Home Loan:
- Pre-approval of home loan need not necessarily mean guaranteed sanction. A pre-approved loan is not an assured loan since it depends on the successful verification of all relevant documents. Banks are under no obligation to approve the loan request and make the final call on whether or not to disburse the approved amount.
- Costs involved: Pre-approved loans are low interest rate loans but it also has certain fees and charges. Most banks charge a processing fee for pre-approval of loan. Such costs are not refundable whether you ultimately avail the loan or not. Generally, floating interest rates are applicable on such loans and if you wish to avail a loan at fixed rate of interest, a pre-approved loan isn’t for you.
- Loans are valid for a specific time frame - if you do apply for it within that period, the pre-approval ceases to exist and you will have to apply later on when the offer is available, and the fee involved will be levied again.
- Affects credit: Credit gets blocked to the extent of the amount that you want pre-approval for. If you need to take a personal loan or an education loan during the period when the pre-approved home loan is valid, your payback capacity will be calculated based on the pre-approved loan.
- Availability of discounts: Discounts on interest rate are offered by most banks, on a pre-approved loan.
- Quicker loan processing: Since the bank already has the important details about your finances, the time taken to process the loan is usually lesser.
- Negotiating with your seller: Having a pre-approved home loan enables you to successfully negotiate with your seller. The builder will be aware that your finances are in order and that you are a genuine buyer since pre-approved loans are available for a particular time period only.
Eligibility for Pre-Approved Home Loan:
If you are wondering whether you are eligible for a pre-approved home loan, look no further. The answer lies in your credit track record. Your eligibility to avail a pre-approved loan is judged by the Banks on the basis of the various accounts you may hold with them. If for example, you have a salary account with a bank, then the bank has access to your transactions such as the amount of salary drawn, liquidity in your account, if you have any loans, late payments and this also helps them understand your cash outflow.
Credit cards that you own also give an insight into your finances. Thus, a savings account and/or a credit card with a bank offers the information required to calculate the amount of loan you could be eligible for. If a customer has an impeccable track record of paying loan EMIs on time and if he/she has an impressive credit score from CIBIL, one of India’s leading credit rating agencies, then the bank considers the customer eligible for the loan that it can offer based on these records.
The process of arriving at the exact amount to be offered as pre-approved loan would depend mainly on factors such as:
- Income and savings capacity of the customer
- Transactions made through the Bank account ( e.g.: cheque bounces would be viewed negatively)
- Consistency in deposits such as salary deposits and other cheques.
- Some banks pre-approve home loans to its existing customers even if they have not taken a prior loan, based on certain factors such as the cash inflow and transactions in their salary accounts or the repayment records, if they are credit card holders.
Interest Rates applicable for Pre-Approved Home Loans:
The main highlight of a pre-approved home loan is that the interest rates will be comparatively lesser than the rate of interest offered to other customers who avail a regular home loan scheme. However, it is important to confirm the nature of the interest applicable, i.e., whether it is a fixed interest or a floating interest.
Banks often consider the interest rate prevailing at the time the customer applies for the home loan, while calculating the borrower’s repayment capacity. Any change in the interest rate during the tenure of the pre-approval will affect the final loan amount. Thus, the amount that is disbursed to the customer eventually, may be different from the sanctioned loan amount due to the adverse impact of interest rate changes. The sanction letter mentions the interest rate applicable for the home loan, and this would be based on prevailing home loan interest rates. Like the pre-approval, the special rate of interest will also be valid only for a specific period, starting from the date of issue of the sanction letter.
Interest rate would also change depending upon the nature of the interest, as chosen by the borrower, i.e., fixed or floating. Kotak Mahindra Bank offers a special interest rate during the period of validity of the sanction, which is one month. The interest rate may change later on, depending on whether you choose fixed or floating home loan rate. This applies for other banks like ICICI Bank, HDFC and SBI.
HDFC Ltd, is one of the oldest private banks in the country and offers a home loan amount of 80% of the Sale Agreement Value rather than the Registration Value with significantly smaller EMIs. Axis Bank promises the lowest processing fees and quickest home loan disbursal. For a pre-approved loan from ICICI bank, the floating interest rate is 9.85% and fixed interest rate is 10%. This is however subject to change.
Pre-approved home loans are a boon for many who wish to promptly plan and execute their real estate investments, but such sanctions depend on several factors and is beneficial only if there is a marked difference in interest rates and charges that would help to save costs incurred while acquiring your property.
FAQs about Pre-Approved Home Loan:
- What are the benefits of a pre-approved home loan offer?
Pre-approved loans have many advantages such as discounts on real estate prices, lesser interest rates compared to regular home loans, quick processing, limited documentation, etc.
- How can I evaluate whether the pre-approved loan amount is right for me?
Loans are pre-approved by Banks on the basis of your credit history and previous loan repayments, if any. Hence, the amount approved need not be as per your actual requirement but based on your capacity to repay the loan. It is important to calculate the actual cost of purchase of a property to decide on the loan amount that you require and not based on the costs of the amount being offered to you.
- What are the documents required?
Depending on whether the applicant is self-employed professional, salaried individual or an entrepreneur, the documents that need to be submitted varies. Generally, the necessary documents include proof of identity, residence proof, bank statement of the past six months', latest salary slip or Form 16, certificate and proof of business existence, income-tax returns of the past three years' (in case of self-employed/business) as well as profit/loss statements, balance sheets and so on.
- What is the validity period?
There is no particular period within which the applicant is required to avail the offer. However, the pre-approval is open only for a maximum period of six months and if the applicant does not apply within this period, it becomes null and void. The validity period might vary from bank to bank. For example, State Bank of India specifies that the borrower has to identify the property he/she wishes to purchase within 60 days. Kotak Bank states that the validity of their home loan sanction ranges from 1-3 months.
- Once I get the sanction letter, when will the loan amount be disbursed?
In order to avail of the loan, the borrower must finalize a property before the expiry date specified in the sanction letter. The property documents are to be submitted to the bank and if the documents are in order, the loan will be disbursed.
