A few months back, Delhi-based Punit Bhardwaj booked a flat in Noida. While he managed the initial booking amount from his own resources, he was banking on a home loan for the rest. To his dismay, the bank turned down his loan request because there was a problem in his credit report. To make matters worse, the builder has refused to cancel the booking.
Though a pre-approved loan ensures you don’t face last-minute hiccups such as these, remember that they tie you down with terms and conditions.
A pre-approved loan is one that is approved for a purpose before the need for it actually arises. The most common are pre-approved personal loans, but home and car loans, too, get pre-approved.
Personal loans are usually pre-approved based on your financial health (balance in your savings account), but in order to get housing loans pre-approved, you would have to go through the paperwork required for a home loan sanction. The only difference is that the bank does not run a check on the property’s title; this is done when the loan gets sanctioned.
"We take into consideration all the criteria that the bank normally have and if someone fulfils those criteria, we issue a pre-approved loan arrangement letter in favour of the customer, which remains valid for two months and within the given time frame the customer needs to locate a property," said Sunil Pant, chief general manager, State Bank of India (SBI).
The tenor for which such loan is approved varies from bank to bank and you need to pay a processing fees here too.
Know your budget: While pre-approving a loan, the bank looks at your repaying capacity and accordingly fixes the loan amount. This gives you a budget and you have to look for a house accordingly.
Get discounts from builders: Some builders provide discounts to customers who have pre-approved loans.
Timelines not a worry: Customers often complain about the time banks take in sanctioning a loan. In case of pre-approved loans, there are no such problems.
Meet deadline for house hunting: Even though you are required to do complete paperwork, the loan remains valid only for a particular timeframe. For instance, while SBI pre-approves a home loan for two months, Kotak Mahindra Bank Ltd pre-approves for six months. It is possible that you do not get the house of your choice in the stipulated period. Then, the loan agreement gets cancelled.
Pay processing fees twice: In case you are unable to use the pre-approved loan within the stipulated time and get it approved again, you would have to pay the processing fees again.
Loan amount may vary: When calculating the loan amount, banks consider your repaying capacity at the prevailing interest rates. However, interest rates may change during the pre-approved tenor. If that happens your eligibility for a particular loan amount may also change. In fact, banks factor in interest rate changes every month and accordingly keep changing your loan amount.
No guarantee: A pre-approved loan does not provide the guarantee of lending. For instance, if you finalise a house but the bank does not find the property satisfactory, it may withdraw the loan.