Shrikant Bangad, 27, successful entrepreneur, was planning on getting married soon. He was keen to buy a home before the wedding. Srikant’s secret to success was his foresight and planning. He wanted to get his home loan approval in place, so that if he liked a particular property he could close the deal without delay. Hence, he contacted some banks to know more about pre approved home loans.
The question is – did he do the right thing ? Let us check.
What is a pre approved home loan ?
Pre approved home loan is in-principle approval for a loan amount. These approvals have a limited validity within which the loan must be availed. The process for pre-approval is essentially the same as taking a normal home loan where all the papers and eligibility is checked by the bank.
The amount approved by the bank will depend on your repayment capacity. Usually banks will approve upto 50-60% of your disposal income.
The documents the bank checks for pre-approving a home loan usually include the following –
- identity and residence proofs,
- the latest salary slip for a salaried person
- Form 16
- past six months’ bank statement
- past three years’ income-tax returns (self and business)
- Profit/loss statements and balance sheet, certificate and proof of business existence etc for a businessman
On the face of it, a pre approved home loan looks like an excellent strategy to save time and ensure you grab your dream home when it comes along. However, at times, a pre-approved home loan may not be quite the sure thing that it looks to be.
For and against taking a pre approved home loan
Pros of taking a pre approved home loan
- It helps you decide on a budget and then you can narrow your search in the range. For instance if you have received a pre-approval of 35lacs, you know that you need to look for a home in that budget.
- If you need to make a quick decision, so as to not lose out on a great deal, it is easier if your loan is pre-approved. Often a great deal is lost because the loan approval is not on time.
- All your paperwork is already in order since the bank has already accessed the papers and approved the loan on this basis.
Cons of taking a pre approved home loan
Shrikant, now has a pre-approved home loan but he has not yet shortlisted a property. He has to now move quickly to find a property within 2 months (the period for which the pre-approval conditions are valid) or else he would lose the Rs 5,000/- he paid the bank for the pre-approval.
While a pre-approved home loan can certainly be advantageous, it does have some strong limitations.
- The pre-approval comes with a time limit. The approval is time bound and if you do not avail the loan with that period, you lose fees that you may have paid for loan approval
- A pre-approval make you complaisant and you stop looking for the best deal. You are restricted to a single lender and do not get a choice of shopping around for a more competitive rate.
- The lender usually does not commit to the rate at the time of pre-approval. Instead, it will give the borrower the existing market rate at the time of disbursal. So you do not have the advantage of locking in a promotional rate, if any.
- The lender will check your credit standing with a credit agency like CIBIL. Each check made by any lender reflects in your credit report. It shows that you applied for a loan. This eventually brings down your credit score as multiple loan enquiries dub you as “credit hungry”.
- The pre-approved loan certainly does not mean that getting the loan is a certainty. The actual loan disbursal will also depend on the property approval and all paperwork being in order.
So the question arises should one go in for a pre-approved loan? It makes little sense to go in for a pre-approval unless you are sure that you can identify a property with the stipulated time period. Usually, it is a waste of money and time to get a pre-approved loan. Banks do not want to lose a good borrower and try to work fast on normal approvals too. Most banks guarantee paperwork of the home loan within 7 to 10 days. Like many other schemes, pre-approval is used more like a gimmick by the banks to attract customers.
Do you agree ? Bonus read – pre approved home loan from MoneyLife website.
Hmmm can’t really say it’s a gimmick in all situations. Govt banks like Sbi takes a lot of time for various approvals. If you have zeroed in a property, I would advise to take pre approval so as to cut short your disbursement time. This is specially helpful when you for for a resale underonstruction property where you want the deal to finalize as soon as possible.
What did you mean by resale underonstruction property ?
resale underconstruction property -> Some call it secondary market. A property which is still under construction but where you are buying not directly from a builder rather from a person who purchased it earlier. Almost always, resale rates are lesser compared to the fresh inventory offered by builders, hence people choose to go for such properties.
Since in this case, you are buying from a 3rd party, there are some risks involved, so you would want to finalize the deal as soon as possible – hence the need for pre-approved loans.