When you want to buy a home, you often look for home loans. To apply for a home loan, you need to first find the property which you want to finance with the loan and then apply with a lender for the required funds. After finalizing the property, if the home loan is rejected, you would not be able to buy the property. This is where pre-approved home loans come into the picture. Do you know what these loans are?
What are pre-approved home loans?
As the name suggests, pre-approved home loans are home loans which are approved by the lender before you have shortlisted the property which you want to buy. The lender determines your repayment capacity based on your income and other eligibility parameters and arrives at a feasible loan amount which can be lent. You, therefore, get an in-principle approval for the loan after which you can select the property and avail the actual loan within a few months.
How do pre-approved home loans work?
Under a normal home loan, the lender first gauges your repayment capacity and eligibility criteria and then calculates the amount of loan for which you are eligible. After the loan amount is calculated, the lender verifies the details of the property which is supposed to be financed with the loan. In case of pre-approved home loans, the first step of calculating your home loan eligibility is done by the lender to give you approval for the loan. Verification of the property is done later on when you actually select the property that you want to buy. Thus, pre-approved home loans offer you home loans earlier since the first step of loan approval is done beforehand.
Features of pre-approved home loans
Here are some important facts and features of pre-approved home loans which you should know –
- Pre-approved home loans might get rejected when you select the property and need actual funds. This usually happens when there are legal issues attached to the property that you have selected or when the lender is facing problems in verifying the property. Thus, having a pre-approved home loan does not guarantee your funds.
- Under pre-approved home loans, floating rate of interest is applicable. The rate mentioned on the approval would be an indicative rate and the actual rate would be the one which would be applicable when you avail the home loan.
- The whole cost of the property cannot be funded by a pre-approved home loan. You would have to make a minimum down payment of 10% or 20% of the value of the property and the lender would offer funds for the remaining cost.
- Pre-approved home loans are valid only for a specified time period which is usually 6 months. You need to select a property and apply for a home loan within the stipulated period to get the benefit of pre-approval. If you do not apply for the loan within the specified duration, the validity of the approval would lapse.
So, a pre-approved home loan helps you avail quick funds for your home. If you are planning to buy a home in the near future, you can avail a pre-approved home loan and then look for the suitable property so that once you have the property in sight, you would get the loan quickly.