Pre-Approved Home Loans – Advantages and Disadvantages

pre-approved loan - advantagePre-Approval of a home loan is the process in which a borrower gets an in-principal approval for the sanction based upon his income levels, financial obligations and credit worthiness. Through this process, a prospective buyer gets to know, how much money he might expect to get as loan, on what interest rate and on what terms and conditions. It helps to fasten the process of actual process of loan disbursal after the borrower zeroes down on a particular property for the purchase.

The Advantages of the pre-approved home loan

Know Your Limits: The most important advantage of a pre-approved loan is that you get an estimate of the loan amount which can be sanctioned to you. This will help you to understand your spending limits and help a great deal to finanlize the property.

Pre-Approved Borrower is considered a Serious Buyer: Sellers and developers always prefer negotiations with a serious buyer. It is a common saying that actual negotiations take place only when the buyer sits with his cheque book in hand. Pre-approval of loan is a sure-shot indicator of your seriousness to enter into the deal. The developers are always ready to give preferential treatment and extend discounts to potential buyers with pre-approved loans.

Saves Time: Pre-approval process saves a lot of time both for the borrower and the developer / seller. In realty sectors, often people find the deals, which simple go away within a matter of days. Sellers and developers often have to circulate the money on daily basis and for them liquidity is of utmost importance.  There are cases, when a developer might offer your good discount valid only for a few days. In such fluid situations, the process of pre-approval saves you lot of time and increases your bargaining power to close the best deal.

The disadvantages of the pre-approved home loan

Although, on the face of it, pre-approved home loans look like a win-win situation they do have their inherent disadvantages. Following is a list of some of the disadvantages.

Processing charges: Nothing is free in this world. Most of the lenders charge a good amount ranging anything from 0.25% to 0.5% of the loan amount subject to a minimum of about Rs. 5000 to Rs. 10,000. The final charge depends upon your negotiation skills and the lender. You should keep in mind that it is and is refundable charge. In case the deal is finalized and you actually are dispersed the loan, you help to pay the processing fees again in most of the cases.

The fixed validity of pre-approval: the validity of the pre-approval is fixed. You are expected to finalise your property within this period otherwise the pre- approval expires and you have to go through the process again.

Please remember that even in case you finalize the deal within the validity period but the bank refuses to sanction the loan for the property chosen by you, in that case also you run the risk of forfeiture of the processing charges charged for the pre-approval of the loan.

Variation in the loan amount:You must understand that the pre-– approval is only an in-principle understanding that the bank is ready to finance a project in case it needs it requirements. But, in practice, at the time after you finally identified the property, the bank may refuse or finance the property or it may also reduce the sanctioned amount for financing that particular property. In such a situation you might have to arrange additional finances as down payment.

Variation in the interest rate: Almost all lenders allow floating rate home loans on pre-approved or pre-qualified home loans. By the time zero in on a particular property, the prevailing interest rate in the market may change and you might be asked to sign the actual loan agreement on revised interest rates. Even further, depending upon the viability or riskiness of a particular property, the bank may decide to charge a higher interest rate.

The Difference between Pre-Qualified and Pre-Approved

Many people used to confuse the two terms. But these are two completely different things.

When you first start your hunt for purchase of your dream home through home finance, you speak with your banker and provide some basic details – may be through telephone or Internet, about your incomes and spending. The banker make calculations and tells you about the approximate amount, which you can expect to get as home loan. This is called pre-qualified loan amount. Please remember that pre-qualification process does not involve checking your credit history and credit reports. It is not a comprehensive check in which detailed analysis has been carried out by an loan underwriter. It is just an initial estimate of your loan worthiness.

Pre-Approval, on the other hand, involves a thorough check on your credit-worthiness. It allows you to know the exact amount, applicable interest rates and terms and conditions, which you can expect from the lender. After the pre-approval, no further check on the credir-worthiness of the borrower is required. The only thing to be considered before the final disbursal remains the property check.

Please also bear in mind that pre-qualification is a term, which is not commonly used in Indian context. Many lenders and borrowers straightaway head to pre-qualification. Even some of the Indian banks and lending institutions tag an altogether different meaning of term pre-qualified loans.

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Lots of approximations and assumptions have been made while developing the calculators.

Please make your own calculations before making any financial decision.