You know that a home loan is given by a bank to fund the purchase or construction of property. Identifying and finalizing the property can often be a long-drawn process, so the question is whether someone can get a home loan approved even before the property is identified. That is perfectly possible and that is called home loan pre-approval.
What is Pre-approved Home Loan?
When we apply for a home loan, the bank normally funds 80% to 85% of the value of the property plus registration charges and stamp duty. One important consideration in such cases is your own ability to service the loan, which depends on your income levels, debt, personal balance sheet etc. Even as you shortlist the dream home, the loan can be approved based on your income documents so that the process is quick after you shortlist the property. Let us look at this in detail.
Highlights of a pre-approved home loan
The pre-approved home loan is a sanction of loan is secured even before the property is finalized, based on income documents, tax returns, personal balance sheet etc. It is almost like a regular home loan, the only difference is that this is an in-principle sanction, subject to the property identified fulfilling all conditions. The home loan pre-approval is based on your capacity to repay the loan and does not take cognizance of other factors like property location, valuation, clean titles, encumbrances, link documents etc.
So, what is pre-approved home loan and on what basis do lenders offer this pre-approval? The general practice is to ask for a few mandatary documents for validation which include income tax return, PAN card, salary slip, address proof, bank statement, statement of assets and liabilities etc. To give a pre-approval, the bank charges processing fee, which would eventually be adjusted when the actual loan is disbursed against the identified property. This pre-approval of home loan is most common where the bank already has a long existing relationship with the customer, as there is already a comfort level.
One of the first things that the lender does in this case is to verify your credit score standing, which is available with CIBIL, based on your PAN card. It shows how you have serviced your loan and credit card debts in the past, any cheque bounces etc. It is a measure of your creditworthiness and a CIBIL score of over 750 is considered mandatory to get a loan easily. Of course, the quantum of loan would still depend on your income levels and the ability to service the loan.
Pre-approval of home loan is time bound
Typically, once the bank completes the verification of all documents and finds you are eligible for a certain home loan limit, the same is sanctioned and communicated to you through the Sanction Letter. This is an official ability of your ability to get a loan, although not an endorsement of the property shortlisted by you. That will be done separately and subsequently. However, there are a few things you must be aware of here.
- Firstly, the pre-sanction has a time limit of around 6 months. You have to finalize the property and get the paper work done within that time frame so that the loan can be disbursed by the bank. Beyond that period, the pre-approval is not valid.
- Secondly, there is a catch. Once the pre-approved letter is cancelled, the processing fee is not refunded or adjusted. You need to apply for a fresh loan sanction and pay processing fees all over again.
Major advantages of pre-approved home loan
Even through, the pre-approval is an in-principal sanction, it does give you a comfort level. Here are 3 main advantages of seeking pre-approval.
- In any pre-approval of home loan, most of the spade work about your financials and loan repayment capacity is already done. Hence, once the property is finalized, getting the loan process through can be fairly quick. The only pending documents for validation are the property papers like the sale deed, cost estimates, non-encumbrance certificate, link documents etc. This enables speedy disbursal of home loan.
- It is said that individuals work immensely better under pressure. Once your pre-home loan sanction is available, you know that you have 6 months to complete the house hunt. You, therefore, put the task of house hunting on top priority. The pre-approved home loan also makes your house hunt sharply focused as you know what property value to look out for.
- Last, but not the least. This pre-approval home loan gives you an upper hand when dealing with builders / developers and negotiating better rates and payment terms. The builder would take you more seriously as they are aware that you already have a sanction letter ready. That is what is pre-approved home loan edge.
Home loan pre-approval takes you faster towards your dream home goal.