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When you are looking for a property the main thing, which plays a vital role is getting your home loan approved by the bank. However, this is another big hurdle to clear while buying a property of your own. Generally, people apply for a home loan once they finalise a property either ready-to-move-in or under-construction. What about having a loan pre-approved and then searching a property within your budget? It sounds exciting and at the same time reasonable, but there are some facts and points, which might change your mind of applying for a pre-approved home loan. With every product there are negative and positive points. It is your decision to take the final call. Though pre-approve home loan offers many benefits and advantages. But like any other product it too has a package of disadvantages. You should pay attention to the bank terms and conditions of pre-approved home loan. How significant a pre-approved loan letter while applying for actual home loan? Let’s take a look at few disadvantages of a pre-approved home loan.
Disadvantages of pre-approved home loan
Processing fee: The processing fee in the home loan is non-refundable. Banks take this processing fee as administrative cost of loan. Most of the banks charge 0.25% to 0.5% as processing fee or at times Rs. 5,000 to Rs. 10,000. They charge this fee for processing your documents, doing validation and other work related to your application. The processing fees is totally non-refundable. So in case if you have applied to any bank for pre-approved home loan you need to pay the basic processing fee. This pre-approved loan is valid for maximum 6 months and in case you don’t manage to apply for the loan or you postpone the idea to buy the property you will lose that money which you have paid as processing fee. Banks even don’t consider your past pre-approved letter if you lapse the allocated duration. If you need the loan after the given tenure you need to pay the fees once again.
Difference in interest rates: The rate of interest of these pre-approved home loans are a bit higher than the home loan rate. There are always a risk factor with pre-approved loan. If you have received a pre-approved loan letter of a lower rate and banks revise their interest rate, in that case you need to apply the higher rate of interest, but in case you have applied for a loan with higher rate and later on banks reduce the interest rate, you need to struggle a lot with the banks to get a revised rate or you need to submit a fresh application for loan once again. Furthermore, in case if your property falls under the category of disputed property, or property in unapproved location, there are chances that bank might reject your home loan application or will offer you a lower amount as mentioned in the pre-approved letter.
Difference in actual sanctioned amount and required amount: Once you select a property and zero your property search the next step is applying for a home loan. In case you select a property of higher amount and bank don’t agree you to pay the same amount, which it mentioned in the pre-approval letter in that case you need to fill the gap of actual amount and sanctioned amount. At the time of approving the pre-approved home loan application bank judge your application on the basis of your credit history and your repayment worthiness, but when you actually apply with the selected property, banks also consider the property value and worthiness along with other factors. Therefore, there are chances that you might get a reduced amount once you apply with your property details.
Zero interest on other home loan options: Once you get a pre-approved loan letter from a bank or you apply for a pre-approved loan in any bank your focus to any other bank reduces or reach to zero level. You have already paid the fee for getting a pre-approved loan and doing the same with some other bank once again require the same process and most important more money as processing fee. Therefore, you don’t pay any attention to other home loan offers and products by different banks.
Don’t focus on low value properties: Once you receive a pre-approved home loan letter you focus on such properties, which are really close to your sanctioned amount or might be a bit lower or higher of your loan amount, but you never focus on such properties which are very lower than your actual sanctioned amount. You just forget that you can still look for some lower rate options as to stay on the safer side and avoid any risky situation.
Multiple applications make negative impact: If you apply for pre-approved home loan again and again or at multiple banks and financial firms it indicates your eagerness to borrow a loan. It will also give a negative impact on your application. Therefore, don’t apply for pre-approved home loan to multiple banks at the same time and don’t apply again and again to same bank month-after month. If you are really serious about borrowing the home loan, then only apply to any bank to get the offer and know the highest offered amount.
Psychological pressure to borrow the loan: Once you have applied for the home loan and you get the approval letter from the bank, the next thing is you want to close the deal within the given time to save your processing fee. Though you are under pressure of saving your amount, but in case if you get a lower interest rate on home loan from some different bank you should always give it a second thought. As you must be taking the loan for at least 5-7 years of tenure and any small difference of even 0.5% can make huge change in your actual interest outgo in those years, which will be much higher than the processing fee for sure.