Buying a home in India is a multi step process, which can be divided into financial and non financial parts. Non financial part deals with site selection as per one’s convenience and taste. Financial part involves arrangement of finances for making payments. Payments can be done from one’s savings or by taking home loan from banks. You approach the bank and apply for the loan which gets approved based on your credentials. Sometimes, banks make things easy for you with a pre approved home loan on your name. In this article, we will try to figure out pre approved home loans and their implications from home buyer perspective.
Pre approved loan
Banks’ main source of earning is the interest they earn from money lent. The more they lend the more the interest earning, subject to no defaults. To enhance their earning, banks are in constant lookout for customers with good credit history whom they can lend with minimum default risk. In this process, they pre- approve home loans for potential borrowers based on their creditworthiness.
Typically banks offer pre-approved home loans to their old customers with good credit history. They check the status of previous loans, credit card payment history and consult CIBIL database to ascertain the creditworthiness of customer.
Due diligence is not done by the bank on the property which customer would buy, hence there is no guarantee that pre approved loan amount will be released. Property being bought should be litigation free for loan release. .
Positive and negative aspects
Table below presents the positive and negative aspects of pre approved home loans.
Quick Processing Time
: Bank is done with your due diligence. Only property due diligence is left which makes the process faster.
Less Hassle while borrowing
: As you are an old customer and bank has already approved the loan, there are less hassles and documentation efforts.
Better Bargaining Power
: Once you visit the home seller with pre approved loan amount, he sees ready cash coming his way and can offer you a better deal. Bargain well while dealing with the seller.
Buyer can focus on selecting home
: As loan approval hassles are out of sight, now you can focus on selecting home as per your choice. Time involved in loan processing can now be spent in better site selection.
Mismatch between need and amount borrowed:
As loan amount is pre-determined by the bank, it might not be in sync with the buyer’s requirement.
Spend it psychology:
Once you get the pre approved loan amount, “spend it” psychology comes to play. You get in a hurry to buy home which might decelerate the due diligence effort. Availability of easy money may prompt you to invest in costly options.
There might be other economical options:
Getting a pre approved loan stops you from exploring other cheaper options. There might be more economical offers from other banks.
Word of Caution
Please ponder over following points before taking final decision
Just having a pre approved loan should not stop you from conducting a comparative analysis of different bank offers. Other bank normal home loan offers might prove better suited as per your individual need. Read the fine print before signing the dotted line.
Analyse your loan requirement before accepting the offer. Do you really need it and are you in a position to repay? If the answer is yes, only then go for the loan. Use it prudently for the real purpose rather than indulging in mindless spending as you are the one who will be repaying it.
Refrain from utilizing fraudulent means to acquire the loan. Pre approval doesn’t mean bank will not do its own due diligence. If they sense something fishy, your credit score will go for a toss.
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