I met my friend Vinit over the weekend and we were discussing about the status of his new home which he had recently purchased. He intends to finance a small part of this investment through own funds and the balance through Borrowed Funds.
He has already entered into an agreement with the seller for the purchase of the fully constructed property and paid him advance money for the same. The balance amount was to be paid in 2 months.
In these 2 months, he started the working on arranging his own funds and applied to a Bank for taking a loan for the remaining amount. Although, he is very quick in taking actions – he still missed out on certain things as a result of which the Banks didn’t disburse the loan on time.
He is currently in a very tight spot wherein the Bank has not disbursed the Loan and time allowed by the seller for making the balance payment is approaching fast.
To avoid such situations in future, we were just discussing if a Pre-approved Loan makes sense and can help avoid such situations.
What is a Pre-approved Home Loan?
Home Loans can be classified into 2 categories i.e.:-
- Loans which are applied for after finalising the property
- Pre-Approved Home Loans i.e. Loans which are applied for before finalising the property
Although the general tendency of a person is to apply for a Home Loan after finalising the property, but now many people have started applying for a Home Loan even before finalising the property. Such type of Loan is called Pre-approved Home Loan and can be taken by a borrower even before finalising the property.
Things checked by Bank before approval of any Loan
There are basically 2 things which a Bank usually checks before sanctioning the Home Loan. These are:-
- Step 1: Checking Loan Eligibility of the Borrower
- Step 2: Evaluating the docs of the property which is intended to be purchased
All banks check these 2 things before disbursing of the Home Loan. In case of pre-approved Home Loan, Step 1 is performed before finalising the property and Step 2 is performed after finalising the property.
In case the loan is applied for after finalising the property – both the Steps i.e. Step 1 and Step 2 are performed after finalising the property which thus becomes a hectic process.
Benefits of taking a Pre-approved Home Loan
- Know your Budget
The Banks sanction the Loans based on the repayment capacity of the borrower, the marital status of the borrower, the qualification of the borrower, the repayment capacity of the joint applicant, credit history of the borrower by checking the CIBIL Score and several other factors.
Although there are several tools available on the Internet which help you in ascertaining the loan eligibility, the exact loan sanctioned will only be clear once the bank has personally evaluated the all the factors which are being taken into account. A pre-approved loan is a written confirmation by the Bank of the amount that they are willing to lend to the buyer.
If the person has applied for a Pre-approved home loan, the borrower is clear of the loan which the bank will sanction and can accordingly plan his finances beforehand for purchasing the property.
Applying for a Pre-approved Home Loan thus gives clarity in the mind of the buyer for the amount which he can avail from the Bank and plan his budget accordingly for purchasing the property.
- Discounted Rates on Pre-approved Home Loans
Pre-approved Home Loans are loans wherein the property has not yet finalised and therefore the borrower has ample time before he has to make the payment. As he has ample time – he can negotiate better with the banker and can get a discounted rate of interest on such loans.
In cases where the time to payment is less, Banks usually have the upper hand and try to charge a higher rate of interest from the buyer. The more the time to payment – the more is the negotiation power with the borrower and the lesser the time to payment – the lesser is the negotiation power with the borrower.
You can check for the Current Home Loan Rates through the following link and apply for the same here:-
- Better position to negotiate with the Seller with a lesser time to payment
The more the time to payment between the advance and the full payment, the higher is the amount charged by the builder. The lesser the time to payment, the lower is the amount charged by the builder. The sooner the seller receives his funds, the sooner he can put them to his use.
In case of a pre-approved home loan, as the loan has already been approved – the buyer essentially does not need much time for making the payment and can therefore the buyer can make the payment on a short notice. This gives more power to the buyer to negotiate with the seller on the price and therefore the buyer benefits by taking such a Loan.
- Mountain of Paperwork
The Banks ask for tons and tons of documents and many a times, the person does not have these documents handy. Moreover, many a times – it also happens that after submitting all the docs for the Home Loan, the banks ask for even more documents which takes up a lot of time. To save out on the time involved for the paperwork, some people prefer to opt for a pre-approved Home Loan.
- Gives the Borrower more time to receive quotes from Multiple Banks
As the property has not yet been finalised, the borrower is not under any pressure for arranging the funds and making the payment to the Seller. This gives the buyer more time to receive quotes from Multiple Banks and take a loan from the bank which offers him the least rate of interest along with other benefits.
Questions to ask yourself before applying for a Home Loan
- When do you intent to purchase the property
- Can you self finance the property or would you be needing a Loan for the same
- Should you take a loan from a Bank or from friends/family
- If taking a loan – how much EMI can you pay every month
- For how many years do you intent to take the loan
When should you NOT take a Pre-approved Home Loan?
Although there are several benefits of taking a pre-approved home loan, a pre-approved Home Loan may not be the best option in all the situations.
The approval of home loan in case of a pre-approved home loan is usually valid for a period of 6 months. So, if you intent purchase a property after this period – you will have to again apply to the banker for a home loan and therefore the benefit of a pre-approved home loan will not work in this case.
A pre-approval loan should be applied for only if you intent to purchase the property in the coming months.