When you enter into the world of real estate in pursuit of finding your dream home, the impact will undoubtedly be overwhelming. The real estate market is a world that is full of limitless possibilities where anything can happen at any time. Sometimes, we would definitely like to have the best, but our financial position might not allow us to get that just now.
Now, when it comes to buying a home, we usually depend upon a home loan for the same. Yes, you read that right! Pre-approved loans are the perfect answer to home buying. But do you know some of the common myths related to pre-approved loans? If not, then this article has got you covered.
Here, we will look at the 6 common myths about pre-approved loans but before that, let's understand what pre-approved loans are!
What Are Pre-Approved Loans?
Generally, buyers start looking for a financier once they choose the property they wish to buy. On the other hand, a pre-approval happens when the buyer has decided to buy a property but hasn't selected a property yet. This buyer would approach a bank or financial institution, give every detail required to process the request further and get an answer in some time.
The bank or financial institution will assess the financial position of the prospective borrower by analysing the borrower's personal information, credit score, monthly income, credit history, work experience etc. On the basis of this information, the bank will allow the borrower to know a tentative amount they would be willing to lend you for a specified period of time. The bank will then issue a letter confirming the same. This is known as the pre-approval of a loan.
Now, there are multiple misconceptions attached to this concept. So, let us find out the reality behind it in order to have a better understanding of pre-approved home loans in India.
Pre-Approved Loans - Myths Vs Reality
1. You have to take the loan once it is pre-approved
The foremost and one of the most common myths related to pre-approved loans is that the borrower has to compulsorily take the loan once it is pre-approved. This actually does not make any sense from the perspective of the lender as well the borrower. If you, as a homebuyer, are not able to find a property within the timeline set by the lender, the validity of the approval will expire. In the same way, if there is any change in your financial status, the bank or lender might drop the offer. So, it isn't always true that you have to take the loan once approved.
2. It is a surety that you will get the loan
All the banks or financial institutions have to employ a great deal of work in order to scan all those documents to arrive at a number they'll be willing to lend you for the dream home purchase. Naturally, the banks will do all in their capacity to turn you from a prospective customer to a customer. However, they have certain limitations.
The overall calculation would change once the intended real estate comes into the picture. While conducting technical analysis, the banks or financial institutions might find a mismatch between the real value of the real estate and the asking price. A bank, for instance, will not lend you Rs. 60 lakh for real estate whose market value is perceived to be the same. This is because it will expect you as a buyer to arrange at least 10% of the property's value from your own savings and get the remaining amount financed even if you have received a pre-approval for Rs. 60 lakh loan.
3. Being pre-qualified is the same as a loan being pre-approved
Another common myth about pre-approved loans is considering pre-qualified loans, similar to a loan being pre-approved. Remember not to be mistaken if these two terms are used interchangeably. Both these terms are not the same thing. A financial institution or bank will grant you the position of being pre-qualified for a home loan after analysing some specific details about you. This is more of an informal and verbal commitment.
In contrast, a pre-approval takes place when you formally apply for a home loan and the banks or financial institutions put in due diligence to process your request. In this scenario, the commitment is more documented and formal. For pre-qualification of a home loan, a prospective borrower may or may not be asked for a processing fee. On the other hand, in the case of pre-approved loans, they have to pay a fee.
4. You can stretch the time limit
If you cannot grab the pre-approved loans within that time period, they cease to exist. This period might generally range between 3-6 months. Once this period is over, the bank will forfeit the amount you have submitted as the processing fee, and the offer will no longer be valid.
Only in specific circumstances, the bank may stretch the time limit if the borrower keeps it in the loop and gives a precise reason for the delay.
5. There is no penalty for not availing of a pre-approved loan
For sure, there is a penalty. The financial institution or bank will forfeit the processing fee if you cannot grab the offer that is stretched for a limited period of time. Also, every attempt to get a home loan gets registered in your credit report. So, making multiple loan attempts and not availing them will directly reflect badly on your credit report. Also, banks will judge you adversely if you have to do serious business with them in the future.
6. Interest rates are the same as regular home loans
The final myth related to pre-approved loans is regarding the interest rates. In most cases, the pre-approved loan comes at a floating rate of interest. So, in case the interest rates dip, you get no benefit at all. Therefore, think twice if you wish to avail a home loan at a fixed rate.
So, are there any advantages of pre-approved loans? Yes, better financial planning is the most significant benefit of pre-approved home loans. Once you have the home loan amount approved, you can be sure about the budget for buying a house. Thus, we recommend you opt for a pre-approved loan if you have at least shortlisted the property, if not finalised, and negotiate with the builder to get a much better price since your funding is almost ready.