A pre-approved home loan offer is a home financing option that has already been sanctioned in principal before you have finalised the property deal. The process is similar to getting a regular loan, except that you can get the offer before identifying a property.
In such a case, the lender provides home financing based on your creditworthiness and credit history. The lender will issue a letter of pre-sanction to you once the validation process is completed.
This comes with a timeframe of 6 months, within which, you must finalise the property deal. In case you fail to get the property within the stipulated time, you can apply again.
Here are some advantages of a pre-approved home loan.
Quick Loan Disbursal: Since the approval process is complete in the pre-approval stage itself, your loan amount will be disbursed quickly once you finalise the property. This helps when you need to speed up financing to book your home or apartment at the earliest.
Easier House Hunting: There are many types of residential properties, such as villas, flats, independent houses and more. Getting a pre-approved home loan will help you gauge your budget and make searching the right house easier.
Based on your financial capacity, you can now narrow down your research.
Better Negotiating Power: You can leverage your sanction letter to negotiate with the builders or real estate agents. You will be taken more seriously due to the evidence of your financial capability. This is another essential benefit of a pre-approved home loan.
Financial Planning Becomes Easy: A pre-approved home loan offer can help you plan repayment and manage your finances better.
You can use a home loan EMI calculator to check your monthly instalments for different tenures.
The application process for a pre-approved loan is almost as same as that of a normal house loan. However, you will be required to furnish a handful of documents in order to successfully secure a pre-approved home loan.
Here is a list of document lenders may ask you to provide:
Identity Proof: Documents which can work are your PAN card, your Aadhaar card, your passport, your driver’s licence or your voter’s ID, among others. You must furnish one of them.
Address Proof: Documents such as your PAN Card, your Aadhaar card, your Driver’s licence and your passport can be submitted by you as a proof of your current address.
Pay slips going back at least three months
A copy of your Form 16
Income tax returns (ITR) going back at least 3 years
Banks statements going back at least 6 months
A bank cheque through which you will pay the non-refundable processing fee
This list is not exclusive since the process to get pre-approved for a home loan varies from lender to lender. Keep in mind that your lender may ask you for additional documents.
Becoming a homeowner is on everyone’s list and can be among the biggest highlights of your life. However, some things that make the home loan application process an exhausting one are as follows:
You must submit a lot of documents when applying for a home loan
You must follow up frequently with the concerned officials
Your loan application could get rejected even after submitting all the required documents
You will personally have to look for and then zero down on a property before applying
But, with pre-approved home loan, you will be able to take advantage of the following:
When you are pre-approved for a home loan, you will know the maximum amount you are eligible for. Additionally, since lenders generally tend to list the properties for home loan pre-approval online, you can search the same and pick a property accordingly.
In the case of a pre-approved home loan, the only documents you must share will be the ones pertaining to your property. This means that you will spend less time applying for a loan.
A lender will only offer you a pre-approved home loan on a house that has already passed quality and valuation checks. This means that there is no risk of your home loan application getting rejected on the basis of the property’s construction quality.
You can start searching for the property after you have submitted the required documents to apply for a pre-approved home loan. In the case of a normal home loan, it is the other way round.
Some of the things that you should be mindful with regards to a pre-approved home loan are:
Potential Harm to Your CIBIL Score: Lenders will perform a hard inquiry for your CIBIL score. If you have applied for a number of loans and credit cards recently, this may just bring down your CIBIL score. Additionally, if your home loan application is rejected, your CIBIL score will fall further.
Possibility of Rejection: Even if you have a better chance to get pre-approved for a home loan, your application can still get rejected by the lender. Rejection may be due to factors such as inadequate income, unhealthy repayment history or a CIBIL score that does not meet the credit score criteria.
Limited Selection of Properties: Lenders will offer you a pre-approved home loan for only a handful of properties, which have passed their own set of checks. This means that your choices for a home that you can buy from the pre-approved home loan amount are fairly limited.
Same Interest Rate May Apply: The interest rate applicable at the time of you receiving the offer may be the same at the time of you applying. So, if housing loan interest rates fall, you may not be able to take advantage of the reduced rates.
Limited Period Offer: Pre-approved home loan offers come with an expiration date of anywhere between 3 to 6 months from the time you get the offer. If you want to purchase a home through a housing loan you will need to apply within that particular time period.
Here are some debunked myths about pre-approved home loans.
Pre-approved home loans are provided in principle. This means that the lender can dissolve the loan after the final details of the property are shared by the borrower. After lenders conduct a risk analysis of the property, they can reject a house loan pre-approval offer.
The processing fees for pre-approved home loans are used to assess a property and carry out other processes. Therefore, as an administrative cost, the processing fees are not refundable.
Pre-approved loans are provided at a floating interest rate. The interest rate at the time of applying will be applicable to your repayment amount.
A pre-qualified loan simply means that you fit within the eligibility criteria of the lender’s home loan process. Pre-approved home loans, on the other hand, are a plan offered by lenders based on your application.
It is the next stage as opposed to a pre-qualified loan.
Applying for a pre-approved loan does have an impact on your credit score. In case your maximum credit limit is ₹90 Lakhs and you have opted for a pre-approved loan of ₹80 Lakhs, you cannot apply for another form of credit.
As your credit score decreases slightly when your credit utilisation ratio is high, your chances of getting a personal or an education loan are lower. In addition, if you keep applying for pre-approved loans and never actually avail of them, your credit score may be impacted negatively.
Pre-approval and pre-qualification are two different levels of getting instant home loan pre-approval. Although these terms may be synonymous, here are some key differences between them:
The lender proposes pre-qualification based on your financial details, whereas you must apply manually for a pre-approved loan.
For pre-qualification, you do not need any property documents. However, your pre-approval loan will only be sanctioned after property assessment.
During pre-qualification, the lender will not discuss the interest rates that apply to your home loan. With a pre-approved home loan, you will get a loan based on floating interest rates.
In addition to interest rates, you also get precise details of loan amounts when you receive a pre-approved home loan offer. Pre-qualification does not provide any information about the loan amount, but you can get these details from the lender.
You can get pre-approved home loans by providing the property details once you finalise the purchase. Then, the lending bank will scrutinise and verify the title and legal information pertaining to the property.
Post all of the mandatory checks, your home loan will be approved. But, the same will happen solely on the basis of your eligibility.
Resident Indians between 21 and 70 years of age are eligible for a pre-approved home loan. Having an existing relationship with the lender can also help your eligibility.
Banks decide your eligibility for a pre-approved home loan on the basis of your income, age, credit history, and past repayment behaviour.
Other factors that determine your pre-approved home loan eligibility are your current debt obligations, your credit utilisation ratio and relationship with the lender.
The only disadvantage of pre-approved home loans is if the interest rates fall while the loan is in the pre-approval and disbursal stages. In such cases, you will not be able to benefit from lower interest rates on your pre-approved home loan.
Pre-approved home loans take approximately 3 to 4 weeks to process if all documents are in order. However, in case of any error in the information or incomplete documents, this process can take longer.
No. The lender makes the final call when property is finalised. It is only after checking the complete information that a lender will disburse the home loan.