My friend recently wanted to buy a flat in Gurgaon. He works for a multinational company and wanted to avail housing loan for buying this property. We started looking at some of the properties and as usual it is not easy to finalize a property that too when you want to buy it for end use. As the hunt continued we realized that we should apply for a loan even before we finalize the property.
We had a reasoning for that but this is always a Chicken and Egg situation whether to get the loan sanctioned and then buy a property or first get the property finalized and then apply for the loan.
Loan Approval before finalizing the property:
The bank in this case will sanction the loan basis the financial parameters of my friend. The bank will issue a sanction letter to my friend which will have the sanction amount. The sanction letter comes with a validity and the validity of the sanction letter varies anywhere between 3 months to 6 months.
If the loan is not availed in this time frame the bank will re process the loan and my friend will have to repay the processing fees. The processing fees is delta of the total loan taken and my friend was not very particular about this. But this is a disadvantage of a pre approved loan.
After the validity of the sanction letter is over the bank will redo a CIBIL check. My friend will not have to resubmit all the papers required for the reprocessing of loan. He will need to provide the delta documents like the latest bank statement and pay slips.
The key benefit of getting the loan approved before buying a property is that we are aware what the maximum loan amount bank can provide us. This makes the decision of buying the property easy and one is sure of his maximum budget for buying a property.
Negotiating with your seller: Having a pre-approved home loan in your hand does give you an edge when it comes to negotiating with your seller. In case buying from a builder it helps in negotiating as the builder is aware that your finances are ready and you are a genuine buyer as pre-approved loans are available for a specific period only.
The key disadvantage is that not all banks fund all under construction properties. In case one is buying under constriction property he needs to be take care of this aspect as each of the under construction projects is funded by few specific banks.
This was not a major issue in our case as we were buying ready to move in property. The property we buy will be registered and not transferred with the builder. As most of banks fund the registered properties, getting a loan pre-approved is an advantage for my friend.
So if one is sure to buy a property in a 3 to 6 months time frame and is reasonably aware about the type of property; my suggestion would be to get the loan pre approved.