Pre-Approved Home Loans: Understand the Benefits and Process

Each one of us desires to own a house that feels like home. However, fulfilling this aspiration requires a sizeable financial outlay. Since most individuals are unable to meet this necessary financial requirement, it is common to apply for a home loan from a bank or financial institution.

Nevertheless, the loan approval process can be time-consuming and may potentially delay your plans, especially considering the ever-increasing demand and prices in the real estate market. This is where a pre-approved home loan becomes beneficial. It bridges the gap between your dream home and the necessary funds, ensuring that both ends of the spectrum come together.

What Is a Pre-approved Home Loan?

A pre-approved home loan is an in-principal approval for a home loan provided based on the lender's evaluation of a borrower's suitability for a home loan, taking into account factors such as financial status, credit history, net worth, age, and repayment record.

Unlike a home loan, pre-approval does not involve a detailed examination of the technical and legal aspects of your desired property. After thoroughly considering various parameters, the bank determines your eligibility, assigns an interest rate, and establishes a specific repayment period.

To avail of the pre-approved loan, the borrower must submit all necessary property-related documents required for further verification by the bank. However, take note that pre-approval does not guarantee loan approval. It serves as an eligibility check, and the lender retains the final decision to approve the loan once you have selected the property and gathered the required paperwork. Typically, pre-approval remains valid for approximately 3 to 6 months, although this duration may vary based on the lender's discretion.

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How Do Pre-approved Home Loans Work?

Here's how the process of pre-approved home loans typically works:

1. Application: The applicant applies for a pre-approved home loan with a lender. This can often be done online or through a bank/NBFC branch. However, some banks like HDFC Bank and ICICI Bank offer online pre-approved home loan limits to some of their customers without an application after considering certain factors, such as their savings bank account transactions, existing loan repayments, credit scores, etc. Such offers are available only for a limited time, and customers can avail of these offers provided they meet other eligibility requirements and submit the required documents.

2. Financial Assessment: The lender evaluates the applicant's financial details like income, credit history, repayment record, etc. This assessment helps in determining the applicant's eligibility and loan amount.

3. In-principal Approval: If the borrower meets the lender's criteria, the lender gives an in-principal approval for the loan, showing the lender's willingness to provide a loan of a specific amount, with certain terms and conditions.

4. Property Selection: With the pre-approved loan in hand, the property search becomes easier for the borrower as he/she can begin searching for a suitable property within the approved loan amount.

5. Documentation: Once the borrower has finalised a property, he/she needs to submit the necessary documents related to the property, such as property papers, title deeds, other legal documents, etc., to the lender.

6. Due Diligence: The lender conducts due diligence, i.e., verification of the property documents to ensure their authenticity.

7. Final Approval: Upon satisfactory completion of the due diligence, the lender gives the final approval for the home loan. The loan terms, such as interest rate, repayment period, and other conditions, are finalised at this stage.

8. Loan Disbursement: Once the final approval is received, the loan amount is disbursed, i.e., transferred to the borrower's registered bank account so that he/she can complete the property purchase.

Take note that pre-approved home loans are not a guarantee of loan approval. The final loan approval is subject to the lender's assessment of the selected property and the completion of all necessary documentation. It simply provides borrowers with an initial indication of their eligibility and loan amount, making the home-buying process more efficient and streamlined.

What Are the Benefits of Opting for a Pre-approved Home Loan?

1. Faster and Streamlined Loan Disbursal:

Since a significant portion of the loan verification process is completed during the pre-approval stage, the actual loan disbursal becomes fast and hassle-free. The remaining documents to be validated are primarily related to the property. Once these documents are verified, the approved loan amount is promptly disbursed. This is particularly advantageous when the property transaction window is limited and a quick process is required.

2. Focused House Hunting:

With a pre-approved loan, house hunting becomes more efficient and targeted. As the applicant already has a predetermined budget based on the pre-approved loan amount, they can focus on searching for properties within that specific price range. For example, someone with a pre-approved loan of 50 lakhs will concentrate their search on properties priced between 45 to 55 lakhs.

3. Easy Negotiation:

Having a pre-approved loan gives buyers leverage during negotiations with builders or sellers. They are taken more seriously compared to other potential buyers, as the pre-approval demonstrates their financial readiness and ability to secure the necessary funds.

4. Better Financial Planning:

Pre-approved home loans provide individuals with a clear understanding of their financial situation and worth. This enables them to plan their finances effectively by determining their savings targets and arranging for the required down payment.

What Are the Factors You Should Consider When Considering Taking a Pre-approved Home Loan?

1. Property Selection:

A pre-approved home loan is a loan offer given based on your ability to repay. However, the actual disbursement of the loan is based on you finding a property within the pre-approved loan's validity period and the property satisfying the lender's legal and technical due diligence criteria. So, even if you have a pre-approved loan offer, the lender may choose not to disburse the home loan if the property titles are unclear or the ownership structure does not align with the lender's allowable norms.

2. Loan Amount:

It is advisable to assess the loan amount offered in the pre-approved loan. Determine if it is sufficient to meet the desired property's cost and your financial requirements.

3. Interest Rate:

You should understand the interest rate mentioned in the pre-approved offer and compare it with current market rates to ensure it is competitive. Remember that the final interest rate will be determined at the time of loan disbursement.

4. Loan Validity:

The pre-approved loan offer remains valid for a specific duration, typically around three months. It is important to complete the property selection process within this time frame. Failure to do so will require you to re-evaluate your loan application, which may incur a nominal cost. You will need to provide the lender with updated income documents for the reassessment.

5. Terms of the Loan:

The loan terms mentioned in the pre-approved offer, including the interest rate, Equated Monthly Instalments (EMI), and repayment tenure, are subject to change. The final loan terms are determined at the time of loan disbursement. For instance, the interest rate environment may have altered by the time you finalise a property, resulting in potential modifications to your loan terms.

6. Financial Stability:

Evaluating your financial stability and repayment capacity is recommended to ensure you can comfortably manage to repay the EMIs of a pre-approved home loan.

To summarise:

Getting a pre-approval for a home loan does not guarantee that it will be approved in its final stages. Several factors, including the property itself, the associated documents, and adherence to the bank's due diligence guidelines, also hold significant importance. It is essential to complete the loan application process within the designated sanction period. Despite these considerations, a pre-approved loan offers distinct advantages that regular loans do not. Furthermore, pre-approval streamlines the loan disbursement process, making it more convenient and straightforward for the applicant.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.