Pre Approved Loan


A pre-approved loan ensures you don’t face last-minute hiccups such as these. But remember that they tie you down with terms and conditions.
What is it ?
A pre-approved loan is one that is approved for a purpose before the need for it actually arises. The most common is pre-approved personal loans, but home and car loans, too, get pre-approved. Banks usually offer pre-approved personal loans on their own to customers, who have a relationship with the bank in the form of a salary accounts, deposits or loans, among others.
Personal loans are usually pre-approved based on your financial health (read balance in your savings account), but in order to get housing loans pre-approved, you would have to go through the entire paperwork that is normally required for a home loan. The only difference is that the bank does not run a check on the property’s title; this is done when the loan actually gets sanctioned. So you would have to produce your salary slips, income-tax return receipts for previous years, among other documents.
“We take into consideration all the criteria that the bank normally have and if someone fulfils those criteria, we issue a pre-approved loan arrangement letter in favour of the customer which remains valid for two months and within the given time frame the customer needs to locate a property,” says Sunil Pant, chief general manager, State Bank of India (SBI). The process is the same in case of other banks, too, but the tenor for which the loan is approved varies from bank to bank.
Like all other loans, you need to pay a processing fees here too. For instance, SBI charges a processing fee of 0.25% for loans up to Rs 25 lakh. So, if you are availing a home loan of Rs 25 lakh, you need to pay a processing fee of Rs 6,250.

The benefits
Know your budget: When pre-approving a loan, the bank looks at your repaying capacity and accordingly fixes the loan amount. This gives you a budget and you have to look for a house that fits into this budget.
“One can add his own contribution to the amount which we have mentioned in our pre-approved arrangement letter and shop around the same budget,” says Pant.
Get discounts from builders: Some builders provide discounts to customers who have pre-approved loans since there is surety that the person is interested in buying a house.
“Since you already have an in-principal approval, you can bargain for additional discount with the builder and at the same time can negotiate with other builders, too, and should settle for that builder who offers the best deal,” says Satkam Divya, business head, Rupeetalk.com, a NetAmbit venture.
Time lines not a worry: Customers often complain about the time banks take in sanctioning a loan. There have been cases where people have missed the property of their choice. A pre-approved loan solves such problems.
The drawbacks
Meet deadlline for house hunting: Even though you are required to do complete paperwork, the loan remains valid only for a particular time frame fixed by the bank. For instance, while SBI pre-approves a home loan for two months, Kotak Mahindra Bank Ltd pre-approves for six months.
It is possible that you do not get the house of your choice in the stipulated period. If you fail to identify the property in the given time frame, the loan agreement gets cancelled and the process needs to start afresh.
Pay processing fees twice: Another thing that pinches is the fact that in case you are unable to use the pre-approved loan within the stipulated time and get it approved again, you would have to pay the processing fees again.
Loan amount may vary: When calculating the loan amount, banks consider your repaying capacity at the prevailing interest rates. However, interest rates may change during the pre-approved tenor. If that happens your eligibility for a particular loan amount may also change. In fact, banks factor in interest rate changes every month and accordingly keep changing your loan amount.
No guarantee: A pre-approved loan does not provide the guarantee of lending. For instance, if you finalize a house but the bank does not find the title of the property satisfactory, it may withdraw the loan it approved earlier.
Nonetheless, a pre-approved loan indicates your ability to borrow and whether or not you fulfil the criteria laid down by the bank. So it may come handy Pre-sanctioned home loans look attractive, but they don’t suit everybody
For a house-hunter, the second biggest hurdle after zeroing in on the dream home is obtaining a home loan. How would you like it if you have the loan in your pocket even before you approach the developer to negotiate? Banks and housing finance companies offer pre-approved home loans even before the borrower decides on the property. While this sounds inviting, there may be some not-so-exciting features that you should be aware of.
The working: The procedure for a preapproved loan is not very different from a regular home loan application-you need to submit the documents along with the processing fee.
These will include (depending on whether the applicant is a salaried individual, self-employed professional or an entrepreneur) identity and residence proofs, the latest salary slip, Form 16, past six months' bank statement, past three years' income-tax returns (self and business) as well as profit/loss statements and balance sheet, certificate and proof of business existence and so on. However, a desirable income level is not the only criterion. Your repayment capacity, too, is a critical parameter.

Home loan
"We take into account the borrower's income-to obligation ratio. Hypothetically, if the applicant's income is `1 lakh, his total repayment should not be more than `55,000-60,000,". Even after your loan is sanctioned, the disbursal will take place only after you identify a property that passes the lender's due diligence test.
"There is no typical period within which the loan seeker is required to avail of the disbursement. However, we keep the file open for six months and if the applicant does not act within this period, we send reminders to the individual," informs an HDFC spokesperson. The validity period varies with each bank. For instance, the State Bank of India, which has been publicising this facility of late, requires the borrower to identify the property within 60 days for the sanction to be valid. In case of, the validity could range from 1-3 months. "We generally prefer a period of one month," says
However, if there is a change in the interest rate, you will be charged the one prevailing at the time of taking the loan. While the interest rate may change, the spread over the bank's base rate will not be altered, unless a significant period of time has elapsed.
Benefits for the borrowers: Buying a property typically involves a mountain of paperwork-with the builder and, later, with the lender. Availing of a pre-approved loan would mean that one part of it is taken care of.
"The borrower's creditworthiness is established already and this helps in negotiating on rates with the builders. Secondly, your total transaction turnaround time comes down," explains. Also, banks advise home-seekers on properties that meet their criteria. Besides, lenders have tie-ups with builders for various projects. "In the event of the borrower (with a pre approved home loan) finding it difficult to take a decision, the bank may direct him to the right kind of project. Thus, if both the loan as well as the project is pre-approved, the processing will be much shorter," he adds.

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