Majority of home-buyers in India opt for a home loan and often stumble across the terms, pre-qualified and pre-approved loans. In this article, we try to understand the difference between the two and the points you need to keep in mind before applying.

Pre-qualification

Often you may have received messages or phone calls from your bank that you are eligible for a loan of up to a particular amount based on your credit worthiness, this is called as pre-qualification. It refers to the evaluation of the credit worthiness of a potential borrower by a creditor for providing a pre-approval. Pre-qualifications estimate an offering amount of credit and does not include an analysis of your credit report or an in-depth look at your ability to purchase a home.

Pre-approval

A pre-approval is the next step, which involves an official mortgage application with the necessary documentation to perform an extensive check on your financial background and current credit rating. After evaluating this information, the lender can give you an idea of the size of the mortgage for which you qualify. With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, sometimes with a specific interest rate. This allows you to look for a home at or below that price level. Pre-approved loans are attractive since they come with lower interest rates, less documentation and quick processing.

Things to consider while opting for Pre-approved Loans

• Banks approve loans based on your credit history and prepayment record; therefore, it may not be necessary that pre-approved loans offer you the amount of loan you need.
• Each time you submit a pre-approval application, the lender will run a credit check. This will then leave an enquiry on your file. Multiple enquiries can affect your credit score negatively. Hence, it is advisable to apply only with the lender you intend to go with.
• Pre-approvals generally last 3 to 6 months. Lenders have an expiry date within which you must find a property, as the borrowers' financial situation and the property market can often change over a few months.
• A pre-approval does not include an assessment of whether the property is acceptable by the lender because it has not been found yet. This is why one of the conditions in the pre-approval will be 'subject to a satisfactory valuation'.
• If your personal or financial situation changes after you have been pre-approved, the lender will need to reassess your application.
• There is always a possibility that interest rates could change. If the interest rate increases, it means the maximum amount you are able to borrow may decrease.