Should I get Pre-approval before choosing a property? What are the pros and cons of doing so?
One of the things you can consider when you are house hunting, is to get a pre-approved loan from the lender of your choice. This is essentially an in principle approval that a bank or financial institution gives a borrower after having judged your borrowing power. It is a statement from the bank saying that you are eligible to borrow a certain amount of money at a specific rate of interest after all the property requirements have been met.
The advantages of a pre-approved loan
- Your house hunting process becomes simpler -Once you have a pre-approved loan, your house hunting procedure becomes easier as you know exactly what to scout for within your budget.
- Greater negotiation power-You also have a greater negotiation power with the builder, as you can assert the fact that you have the financial means to close the deal that you are seeking.
- Quicker disbursal-A pre-approved loan also calls for a quicker disbursal when you are actually taking the loan because the bank has already given you an in principle approval. This means that you no longer have to worry about losing out on a property because you are unable to put together the resources on time.
Disadvantages of a pre-approved loan
- Not an automatic guarantee- You must also remember that a pre-approval is not a guarantee that the bank will actually disburse the said amount. The bank may use its discretion to change its decision at any time, if it thinks that the property you have chosen does not match the bank’s risk profile. Further the interest rates that a bank specifies on the letter of pre-approval is only indicative and may be subject to change at any point of time, at the discretion of the bank depending upon the base rate.
- Comes with a processing fee -Do not be under the impression that a pre-approval is free. All lenders charge a processing fee that becomes non-refundable if you do not apply for disbursal within six months of the pre-approval of the loan.
- Change in the loan amount: The pre-approval from lender is only an in-principle approval that lender is ready to fund a particular loan amount. However when you finally identify a property, the bank may refuse to finance the property or it may also reduce the sanctioned amount for financing that particular property. You may in such situation cough up the additional margin money required for the down payment.
Difficulties in getting a pre-approved loan
- Cumbersome documentation process- As rosy as it sounds, it may not be as easy to get a pre-approval. Firstly, the process of getting a pre-approval is no less cumbersome as far as documentation is concerned. All the lenders are going to ask you for a lot of information with regards to your income statements, salary slips, bank statements, tax returns and proof of your identity.
- Your CIBIL score will be a key determinant- Most importantly, any lender will pull out your credit report from CIBIL and check your credit history. Your dream of owning your own home may go kaput if your CIBIL score is poor.
However, if you have a good credit score and all your other documents are in place, the bank may be willing to give you a pre-approval. Do bear in mind though, that you will be asked to resubmit all of these documents along with the property related papers when you are actually taking the loan.
All the disadvantages and difficulties notwithstanding, if all your documentation is in order and you have a fair idea about the kind of property you wish to own, a pre-approved loan is a good idea as it makes the actual borrowing process a tad easier.