Why You Should Get Your Home Loan Pre-Approved
Priya Sen, a 32-year-old engineer, was all set to apply for a home loan. She could afford the down payment, but she had a difficult time choosing between the projects she liked. She feared if she takes longer to finalise the deal, she may miss out on the prevailing low home loan interest rates. Priya also feared that banks may reject her home loan application, until she heard about Pre-Approved Home Loans.
MakaaniQ tells you everything you need to know about pre-approved home loans.
What is a pre-approved home loan?
Pre-approval of a home loan is a process in which the bank evaluates the application to see whether the borrower qualifies for a loan, or, at least, for the most the bank is willing to sanction. In layman's terms, applying for a pre-approved home loan is applying for a home loan minus the house property.
What do bankers look into, when there is no property?
Pre-approval of home loan is a process to assess your home loan eligibility. This does not involve verifying the legal and technical validity of the property you would like to buy. Lenders will look into your repaying capability, income status, existing obligations, age, net-worth, credit score and credit history. Banks extend a home loan of a certain amount for a fixed period after evaluating the application based on all these parameters. Banks look into all the determining variables and decides your home loan eligibility at a definite Fixed-Obligation-to-Income ratio (FOIR). The Loan-to-Value ratio (LTV) has no role to play in the pre-approval process because, in the pre-approval process, there is no property to arrive at the market value.
Does pre-approval guarantee that you will get the sanctioned loan amount?
You must understand that the sole objective behind the pre-approval of home loan is to estimate your ability to repay the amount the lender 'approves'. You can shortlist the property and plan your budget based on this amount.
But the pre-approved loan is not a guarantee that you will be granted the loan amount mentioned in the sanction letter. The reason is that you have not finalised the property yet. The bank will decide the final loan amount after verifying the legal and technical validity of the project. The loan will ultimately be disbursed according to the kind of property (be it under-construction or ready to move in etc.) you finalise, and the bank's prescribed LTV norm (i.e. a fixed percentage of the market value of the property). A 'pre-approved sanction letter' is like a provisional sanction letter.
The final discretion lies with the lender to decide whether to lend you the pre-approved loan amount.
How would you benefit by getting your home loan pre-approved?
You will become well acquainted with the home loan process. You will also have a fair idea of what banks expect from you. You will also understand the rationale behind asking you to submit a large number of documents.
You can plan the budget for your dream home according to the loan amount pre-approved by the bank. You will have a fair idea of the volume of money you have, the volume of money you need to arrange, and loan amount the bank may extend.
You will also be able to estimate the extra expenses you may have to bear in the home loan process while shortlisting the property. You can arrange funds keeping all this in mind.
Your odds of getting a better deal from the developer is higher if you have a pre-approved home loan sanction letter from the bank. The letter shows that you are serious about buying the home.
The credit appraisal and the final disbursement of loan happen faster for a pre-approved home loan buyer. This is so because the only verification that remains pending for the lender is the legal and technical inspection of the property.
Things you should keep in mind while applying for a pre-approved home loan
Do not forget that the processing fee (PF) is non-refundable for a pre-approved home loan. For instance, if you finalise the property after the pre-approved home loan sanction letter expires (the period varies from 3 months to 6 months), you will be charged the full processing fee amount again to get your home loan appraised.
You must ensure that a particular project in which you want to invest must be among the 'approved projects' of the bank you approach. Otherwise, the lender can reject the final loan application.
It is also important to keep in mind that your final home loan interest rate will be offered at the rate locked during the pre-approval of the home loan. A decline in the home loan interest rates will not have any impact on the rate offered to you.
You can always ask the lender to add the co-applicant, even after the loan is pre-approved, to improve your eligibility.
A pre-approved home loan has a direct impact on your credit score. If your home loan is pre-approved many times, there will be more home loan inquiries in your credit report. So, do not apply for a pre-approval of home loan unless you are sure that you want to buy the house.