All you need to know about pre-approved home loans

[ecis2016.org] While a pre-approved home loan may let the borrower know his home loan eligibility in advance, there are several other factors that one should consider, before opting for one

What is pre approved home loan?

A pre-approved loan is one where the borrower applies for credit, without having finalised the property. In effect, this is more of a creditworthiness-gauging exercise.

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Advantages of pre-approved loans

A pre-approved home loan offers many advantages. For example, it lets the borrower know his home loan eligibility, in advance. This can help the borrower to select a property that actually fits his budget. Sellers may also consider buyers with pre-approved loans more seriously, as the chances of closing the deal faster will be much higher. Consequently, they may also allow such buyers a certain degree of latitude, at the time of negotiation. Nevertheless, home buyers must remain conscious of the other aspects of the home loan deal, before opting for a pre-approved loan.

[ecis2016.org] When should a home buyer opt for a pre-approved home loan?

Pre-approved home loan cancellation

Pre-approved loan agreements stand terminated, in case of any changes in your earning and consequently, repayment capabilities. Numbers available with the Centre for Monitoring Indian Economy said 12.2 crore youth in the age group of 20-30 years lost their jobs in April 2020, following the nationwide lockdown in the wake of the Coronavirus pandemic. If any of these people had a pre-approved housing loan, the bank would refuse to honour the commitment, because of the change in the borrower’s financial position. This means that all the paperwork and processing fee will go down the drain.

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Pre-approved home loan validity period

The bank gives you a specific time period, within which you have to make use of the pre-approved home loan. This could vary between three and six months. The arrangement loses its validity, if you do not select a property within this period and close the deal.

Processing fee on pre-approved loans

Only a few public banks do not charge any processing fee on pre-approved home loan requests. Most private lenders levy a standard fee for processing your request, as they have to perform due diligence which takes time. The fee could range between Rs 1,500 and Rs 3,000. However, this money would go to waste, if you are not able to close the deal within the stipulated time.

“In case the customer decides to not to avail of the pre-approved home loan, or if the validity period has expired, the processing fee paid by him is not refunded as a norm. However, a customer can always place a request, to extend the validity period, if he has finalised the property against which the loan will be taken,” explains Shaji Varghese, business head, PNB Housing Finance Limited.

Will a pre-approved loan impact my credit score?

A borrower may make several inquiries with various financial institutions, before selecting a product that is suitable to his requirements. However, it may happen that the borrower is unable to close a home purchase deal, within the stipulated time. Each of these details will find their way into the loan seeker’s credit report. Hence, you should not seek a pre-approved loan, unless you are clear about your requirements.

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Will interest rate changes affect my pre-approved loan?

The RBI recently lowered the repo rate to 4%. Consequently, the interest rate on repo rate-linked home loans, is set to hit a record low. Should you not get your home loan pre-approved at this point, use the lockdown period to select the property and buy the property later, once the lockdown is lifted? While this may sound like a perfect plan, the rate prevalent at the time you got your home loan approved, will change with changes in the policy rates. Only the home loan is pre-approved in this case. This is not to be confused with a fixed interest rate, as well.

How much pre-approved loan will the bank disburse?

Banks offer you a home loan based on two factors – your personal eligibility and the worth of the property. At the time of offering you a pre-approved loan, they would have only assessed your personal eligibility. Once you finalise the property, they will assess the property, to decide the loan they can actually offer to you. Your personal eligibility might be for a home loan of Rs 1 crore but the bank will not offer you this amount, if the property itself is worth Rs 1 crore. A bank can fund only 80% of the property value as credit under standard practices – this is known as the loan-to-value ratio.

Other terms and conditions for pre-approved loans

The pre-approval for the loan notwithstanding, the bank will not entertain any request to fund the purchase of a property that is caught in the slightest of a legal dispute. Pre-approved home loan documents invariably have a clause specifying the same. Similarly, a project has to be among the ‘approved projects’ list of the bank, for it to lend the money.

The terms and conditions in pre-approved home loan documents are laid in a way that any changes in your personal and professional situation, frees the bank from meeting any obligation specified in the agreement. It also offers the bank certain latitude, in terms of rate change, etc. Read the document carefully, to understand these clauses and their implications.

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