A few months back, Delhi-based Punit Bhardwaj booked a flat in Noida. While he managed the initial booking amount from his own resources, he was banking on a home loan for the rest. To his dismay, the bank turned down his loan request because there was a problem in his credit report. To make matters worse, the builder has refused to cancel the booking.
“I had availed a personal loan and was punctual in paying my instalments. But due to some error on the part of my bank, my credit information report shows a default against my name. Owing to same reason, the bank (different bank) is refusing to finance me any loan,” says Bhardwaj. Now Bhardwaj is running between banks and non-banking financial companies. A little foresight and planning could have saved him the trouble.
Illustrations By Shyamal Banerjee/Mint
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.
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.
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