What You Need to Know About Home Loan Pre-Approval

By Megha Jain, Content Writer  |  Saturday, 23 November 2024, 03:36:24 PM IST

What You Need to Know About Home Loan Pre-Approval

Are you finalising your dream home but want more funding? Home loan pre-approval offers peace of mind when searching for properties, besides faster processing later. But what exactly does it mean, and how useful is it?

Let's examine key aspects borrowers should know.

What is Home Loan Pre-Approval?

Pre-approval, also called in-principle sanction, is the loan provider's conditional commitment to offer you the loan. This is based on assessing your income, credit score, existing liabilities and intended property details.

It certifies that you meet the eligibility criteria and are creditworthy per loan provider guidelines. While not a formal approval yet, it makes a property purchase more certain, knowing funding is pre-arranged.

How Does the Pre-Approval Process Work?

Here are the typical steps:

  • Share financial documents like salary slips, bank statements, ITRs
  • Provide property intents, such as budget, location, configuration, etc.
  • Fill out a detailed application form with personal and professional details
  • The loan provider evaluates income, liabilities, credit score, etc.
  • If eligible as per policy, you get an in-principle home loan sanction letter
  • The letter specifies the loan amount, tenure, rate of interest applicable, etc.
  • Conditional on final property meeting lending guidelines

The pre-approval amount depends on the repayment capacity assessed. For salaried borrowers, permissible EMI is 40-50% of monthly income. Self-employed customers need 2 years of ITRs showing stable earnings.

Using a home loan calculator during this process helps borrowers assess their repayment capacity and eligibility, making the application more straightforward.

Benefits of Securing Pre-Approval

Let's discuss why getting pre-approved for a home loan makes buying a house easier:

1. Certainty on Funding, Enhancing Purchase Power

The key benefit of home loan pre-approval is its assurance regarding financing even before you identify a property. Knowing you have already cleared the first funding hurdle facilitates property search.

Sellers take pre-approved buyers more seriously than other potential buyers who are still determining whether banks will finance them. This gives them greater credibility and leverage in negotiations.

2. Faster Processing Later

Since detailed financial assessment is already completed at the pre-approval stage, final loan processing and approval after property selection becomes much faster. This allows quicker completion of sale formalities.

3. Rate Lock-in for the Initial Period

Most loan providers offer rate lock-in for 60-90 days on the pre-approved loan amount if you choose a property fitting eligibility criteria. This protects borrowers from rate hikes during the initial property search period.

Factors Impacting Home Loan Pre-approval Eligibility

While pre-approval offers many benefits, qualifying depends on several aspects of your financial situation that loan providers evaluate.

Let's examine critical parameters that impact home loan pre-approval eligibility:

  • Income Levels and Stability: Salaried borrowers prefer higher and more predictable incomes for the last 2-3 years. Self-employed customers need consistent earnings reflected in their latest IT
  • Credit Score: Scores above 750 signify good credit behaviour. Higher scores make loan providers perceive you as low risk. Anything below 700 can impact eligibility. However, different loan providers have varying credit score cutoffs to assess eligibility, so verify specifics when comparing loan providers.
  • Existing Obligations: Total EMIs and credit card dues shouldn't exceed 50% of monthly income to service more debt through home loans.
  • Property Budget: The pre-approval amount depends on your repayment capacity falling within permissible limits. Budget within this to prevent later surprises.
  • Location Preferences: Areas with good connectivity and infrastructure are more accessible to approve than remote regions with lower technical valuations.
  • Down payment: Higher own contributions above mandatory levels (15-20%) denote seriousness and secure quicker pre-approvals.

Therefore, strengthening your case on the above parameters before seeking pre-approval can enhance your chances of securing an in-principle home loan sanction.

Conclusion

Home loan pre-approval offers significant advantages, like funding certainty, speedier processing, and initial rate lock-ins. However, limited validity, conditions around property details, and no guarantee of actual approval post-property selection are aspects to consider.

Weigh the benefits versus restrictions based on your priorities. Securing pre-approval early can give you an edge, provided you choose the final property prudently and meet loan provider eligibility norms for location, value, configuration, etc.

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