Pre-approved home loan – how it works

Usually, there is a lot of insecurity among home buyers till a bank approves their loan. A pre-approved loan is a product offered by banks to give some respite to such anxieties. Simply put, a pre-approved loan is an instrument that banks use to lure customers to avail a loan without much hassle.

In a pre-approved loan, the amount sanction is based on the preliminary yet crucial checks done by the lending institution, to ascertain the financial eligibility of the borrower which includes his repaying capacity and credit history.

So, how does one get a pre-approved home loan?

Once the purchase decision is finalized, the person desirous of availing a pre-approved home loan has to provide the property details. The lending institution will verify the legal and title information of the said property. Important conditions such as interest rate, tenure, penalties, etc., are then settled. . The loan is disbursed only if all papers are as per the norms of the lender. The pre-approval is valid for a period of about three to six months. The borrower is required to complete the transaction before the expiry of the approval.
If you are wondering what are the advantages of availing this kind of product, read on.

The biggest advantage of a pre-approved home loan is that it lets you plan your finances. From the beginning itself, it is clear how much loan you can avail. So, you look for only those properties that suit your budget, thereby making your search more focused.
Unlike standard home loans which take more time to process, having a pre-approved loan allows you the flexibility to negotiate for a better deal because you are identified as a serious buyer by the builder or the seller of the property. And since in the latter variant, the income documents & credit rating is already established, acquiring a home loan becomes much faster.

However, caution needs to be exercised due to some demerits that tag along with pre-approved home loans. Opt for pre-approval, only after short listing a few potential properties. Frequent applications can lower your credit score.

Further, in case you decide to not avail of the pre-approved home loan or if the validity period has expired, the processing fees paid to the lender are not refunded as a norm.

Industry experts also point out that if the interest rates fall between the pre-approval and the actual disbursement, the borrower may not benefit from the reduced rates, as the rate of interest has already been decided on.

Remember, taking a pre-approval just because a financial institution is offering it to you, is not at all a prudent thing to do. Apply for it only if and when you require it.

Go through the terms and conditions for payment/prepayments very carefully. Understand the benefits, such as special or discounted interest rates, determine the applicable penalties and charges before applying.