While you plan to buy a home, a pre-approved home loan could be of huge advantage as it will not only help you to know your spending limit but will also aid in striking a better deal with the developer.
Did you know that you could formally check your home loan eligibility with your Bank / Housing Finance Company (HFC) of your choice even before you start looking out for your dream home? Yes, most banks / HFC have a process called “pre-approval” of home loan. This means that you can apply for a home loan without having to submit any documents pertaining to your property and have the luxury of six months for a peaceful search of your dream home with the assurance of a home loan disbursement from the bank at the end of the search.
The pre-approved home loan would also have the added advantage of providing you with some assistance in your property search process. Banks have a list of approved developer projects that they can share with you to give you an initial idea about the price, specifications and location of your dream home. They can also help you build your knowledge about good developers and projects who have strong credentials.
How does a pre-approved housing loan work?
A home loan application is approved based on the following appraisal conducted by the banker:
Credit Appraisal- Capacity to repay
Verifications and KYC Appraisal- Verifications of borrowers’ identity and income documents
Legal Appraisal- Legal title search
Technical Appraisal- Valuation of the property and compliance of various statutory regulations and building bye-laws
In a pre-approval process, bank conducts the first two appraisals initially i.e. capacity to pay and KYC appraisals. The legal and technical appraisal is done post identification of property in the pre-approval process. Here, the bank will put a condition on this pre-approval that the loan eligibility is subjected to legal and technical appraisal to be conducted by it based on documents submitted by you prior to disbursement.
As part of the verification process, a specialist from the bank would conduct visits at your residence and office, verify your KYC documents and validate the income documents submitted before granting a pre-approval. It is pertinent to note here that even if you do not submit the details of other loan facility availed by you from any other bank/ financial institution, your bank would still get to know of the same from credit bureaus. They would not only know about the loans availed but the date when you availed the same, the EMI you are paying and the repayment history for the last three years.
Based on the home loan applications, KYC, income documents viz. your salary slip, Form 16, Bank Statement for last 3-6 months, and income tax returns for self-employed borrowers in lieu of salary slip. The Bank after conducting verifications of KYC and income documents submitted, would arrive at your home loan eligibility by looking at your gross and net income and other loan obligations currently being serviced by you.
If a loan has been pre-approved, does it mean the bank is obligated to disburse the loan at agreed commercial terms?
The bank is not obligated to provide the home loan pre-approved as banks clearly state that the pre-approval is only an in-principle approval subject to legal and technical appraisal of property & its documents.
Also, the commercial terms can change if the disbursement date is far away. The bank will always apply the commercial terms applicable on the date of disbursement viz. interest rate, EMI, processing fees, loan tenor etc.
Will the subsequent legal and technical appraisal impact my pre-approval?
The Bank/HFC will conduct a legal and technical appraisal of the property selected by you once you finalise the same and inform them. They reserve the right to decline your loan in case the property legal and technical appraisal standards of the bank are not met.
In case the property identified by you is in a developer project that is already approved in advance by your banker then you are not required to submit any legal and technical documents. You will just need to inform them about your unit in the developer project. The banker would in this case, would straight away confirm your home loan disbursement without conducting any legal and technical appraisal.
Since there are restrictions imposed by the regulators such as RBI/NHB on the quantum of loan approved by lenders in relation to value of property, known as loan to value ratio (LTV), the loan may be required to be downsized based on market value and documented value of the property identified by you irrespective of whether based on your income you are eligible for a higher loan amount.
What are the charges/fees for getting a pre-approved loan offer?
Banks do charge a loan approval fees /processing fees (PF) for all regular home loans approved and disbursed by it. Hence, for the pre-approval you have to pay the loan processing fee. Some bankers do have special schemes where they waive off this fee while others have a policy of PF refund when the loan is disbursed. On the other hand, many banks do not charge any processing fee or charge a token of Rs.500/- PF.
What are the advantages of a pre-approval if it does not guarantee a disbursement?
If at the end of the day it is only an in-principle approval that the bank issues that too, subject to terms and condition, what is the use of pre-approval?
Help you in estimating the value of property you need to identify
If you get your home loan pre-approved, it will help you in identifying a target house that is within your budget. Your search becomes very focused and you will have peace of mind about the EMI you need to pay post loan disbursal.
- Power to negotiate better
When you have a pre-approval, your ability to negotiate with the lender is better since he knows you have your money all tied up and that you are a serious buyer ready to close a deal.
- Developer & real estate agent
Whether it is a real estate broker or a developer, the moment he knows that you have a pre-approval in hand they will be willing to walk that extra mile in terms of showing you the property and revealing the inventory as well as offering the best price.
- Quicker loan disbursal
When good and desperate sale deals come your way your ability to turn around loan disbursement quickly will make you the buyer of first choice.
To ensure that you do not lose out on your dream home due to external factors like running short of time to apply and take disbursement of your home loan, get best purchase price from agents you could opt for a pre-approved home loan. You would thus also ensure a smooth home purchase process. Better still, you could opt for a pre-approved “property” along with a pre-approved “home loan” that would enable an even quicker dream home purchase process.
Disclaimer: The views expressed in the article are solely of the author and may not represent 99acres.com's opinions on the subject. 99acres.com does not take responsibility for any actions taken based on the information shared by the author.