In today's world, with expensive lifestyles and high inflation, buying a house without a loan has become almost impossible for the common man. Loans are the primary requirement for home buyers to confirm their buying ability.
Banks have started offering Pre-approved home loans to customers in order to increase their business. 'Preapproval' means a virtual confirmation of the loan and precedes the actual loan disbursement.
Pre-approved loans are offered by banks usually to their existing customers, based on their credit worthiness. So if you have seen a property for a particular value, or even if you simply have an idea about the budget of your house, you can opt for a preapproved home loan.
Your status on the previous loans, credit card history and general credit rating is considered before granting you a Pre-approved loan. Most of the time, people think that Pre-approved home loans are different from the normal loans.
However, there is no difference between a Pre-approved home loan and a normal home loan, except for the processing time and basic due diligence, which is done at an early stage.Let's look at some positives and negatives of a pre approved home loan.
The positives
A Pre-approvedhome loan results in quick processing and faster turnaround time for the loan. As the bank has already completed your due diligence, you just have to wait for the due diligence of the property to be done.
You can use a Pre-approvedloan as a bargaining chip with the builder, as he may offer a lower rate when he sees that the cash is ready.
Banks usually grant Pre-approved loans to existing customers. This means the borrowing comes with fewer hassles and easier documentation. The time spent on loan processing can be effectively used by the buyer to select a good property.
A Pre-approved home loan boosts the confidence level of the purchaser who will have a clear idea of the budget available. The buyer has clarity beforehand on the EMIs that will need to be paid. In effect, the buyer can understand how the finances will change even before the purchase.
The drawbacks
Once you get the preapproval for a loan, you will be given a timeframe by within which you should finalise the property. If the borrower is unable to respond within the given time period, the preapproval may be cancelled. Due to the restricted time period, you may take rash decisions while deciding on the property and may also settle for costly options.
There may be a mismatch between what you get and what you need. You may need only a loan of Rs 30 lakh, but have got a Pre-approved loan of Rs 40 lakh. A higher approval limit may tempt you to go in for costlier property, which in turn will increase your liabilities and hence EMIs.
Some banks may require you to pay a non-refundable fee to avail a Pre-approved home loan. If you are not able to select a property within the given time frame, you will stand to lose this fee.Also remember that a Pre-approvedloan is subject to the due diligence of the property. If the bank is not satisfied with the property, you may not even get the loan sanctioned.
The biggest disadvantage of a Pre-approved loan is that you may not compare home loan options from other banks, since easy money is also available. You may miss out on cheaper options from other banks.
Exercise caution
You can go for a Pre-approved home loan provided you take the necessary precautions. If you have decided on buying a house, getting a preapproved home loan is a blessing, as you can save a lot of time and effort.
However, remember to analyse your loan requirement before you take up the offer. Even if you have received a particular loan as a Pre-approved amount, you must avail only to the extent that it does not impose a burden on your financial position.
Remember that getting a Pre-approved loan should not stop you from comparing options in the market. Choose a property based on other factors and not simply on the loan that is preapproved.
Finally, remember that a Pre-approved loan does not mean that you utilise the loan by fraudulent means or by misrepresenting facts to the bank. The bank will not only reject your loan, but it will also affect your credit score.
The writer is the CEO of BankBazaar.com
