At times one may get a call from the finance companies about having been approved of a loan even without applying. This is a situation when depending upon your credit rating the bank offers you a home loan which can be disbursed quickly on application for it. However it needs to be understood that pre approval doesn’t mean the final commitment of approval. There are still several stages such as valuation of the property and processing of the documents before the bank finally approves the home loan.
Advantages of a Pre-approved Loan over Regular Home Loan
The key benefits in this arrangement include:
- Reduced time for sanction as the preliminary verification of eligibility and credit rating would have been done by the bank and only the second stage of property assessment would be remaining.
- It provides the customer the freedom to choose the property being sure in his mind that the loan would be sanctioned on application.
- It also gives the customer some more room for bargaining as it is the bank which is interested in disbursing the loan to him and not vice versa.
- Since in most cases the pre approval is valid for a period of 6 months it provides adequate time for the customer to choose or wait for the right property.
- The customer can now bargain better with the property seller as he has the approval advantage already with him. Pre approval demonstrates financial strength of the home buyer which can be used when dealing with brokers.
Drawbacks of Pre Approved Loans against Regular Loans
Along with the host of advantages that are offered in a pre approved loan there are a few pitfalls which need to be guarded against.
- Pre approval may set in a false feeling of having got the loan disbursed which is not the real case. There still a great deal of effort remaining in terms of valuation and documentation which has to be followed up meticulously.
- Applying for pre approval to too many finance companies at the same time may result in lowered credit rating as each application is reflected in the credit scores whether or not one avails the loan in the end.
- Pre approval implies that the customer is now taking a product which the bank has designed and not what he really wants. There is a tendency to borrow more than one can afford in case of pre approved loans.
- The actual rate of interest that is applicable will be as per prevailing conditions at the time of actual disbursement and not what is stated in the pre approval intimation. Being a long term loan a minor variation can also imply huge extra payments in the overall period.
- The processing fees may be higher for pre approval which the borrower must guard against.
Keeping the above mentioned pitfalls in mind one can exploit the advantages of the pre approved loan to negotiate a better deal for himself both with the financier as well as the property seller.