Be A Smart Property Buyer With A Pre-approved Home Loan

Anil-Pharande

 

 

 Anil Pharande, CMD – Pharande Spaces

Home buyers, and especially first-time buyers, would like to be in the best position to make their purchase once they have identified their dream home. The most challenging aspect of home ownership is invariably financing. Questions like which lending institution to approach, what loans should be applied for, how much loan to be applied for and how much time will it take for approval need to be answered.

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The best ‘be prepared’ move on this front is to become pre-approved for a home loan. Doing so means that this tricky and time-consuming aspect of home purchase has already been dealt with, and that one can enter the market focused squarely on the best options. Getting pre-approved also puts you in the strongest possible place when it comes to negotiating the best deal.

 

What is the difference between loan pre-qualification and pre-approval?

Pre-qualification for a home loan is more or less like an educated estimate provided by the lending company. They will be letting you know the type of loan you could qualify for, and the maximum amount. The estimate is usually based on your financial history, loan eligibility and buying power. A pre-approval, on the other hand, is a written confirmation by the lender.

Before handing over the pre-approval certificate, loan officers will completely access your employment and remuneration information and do a complete ‘credit-worthiness’ check. This involves collecting all the data related to your past and current debts, repayment history, disposable income, credit card record, etc. and running it through software that will calculate whether you could be a likely candidate for approval.

How to secure a pre-approved home loan?

While seeking to become pre-approved, it is always best to approach a lending company that you know or can be referred to by a friend, colleague or family member. The lender needs have the assurance that you are a credible borrower. However, do not stop searching after you have met the first possible lender.

Ask around and look for the lending institutions that that provide the most competitive interest rates and are known for their helpful customer service. The loan officer from the identified lending institute will then pay you a visit and help you streamline your financial statements so that you become ready to discuss your bank statements, investments, holdings, salary slips, income tax returns and other information related to your finances. This basically starts the process which will end with you becoming a pre-approved borrower.

What good will a letter of pre-approval do?

Firstly, a pre-approval letter lets you know the exact budget range you should be searching in. This helps you stay in sync with your financial reality and keeps you from allowing your focus to stray to properties that you cannot afford. Secondly, having a pre-approval letter means that you can grab an offer immediately when it comes across and is in your budget range.

The letter states that the finances are ready when you choose to ask for them. Important Note: it is highly advisable to work with lenders who have the ability to provide customized pre-approval letters, inclusive of the maximum purchase price. Sellers could get greedy if they see a greater loan amount than their quote.

Getting pre-approved for a home loan is a crucial step that can put you in the best possible position in the home buying process. It will give you both peace of mind and keep you focused on what what to look for and what to avoid in terms of affordability.

About The Author:

Anil Pharande is Chairman of Pharande Spaces, a leading construction and development firm that develops township properties in Western Pune. Pharande Promoters & Builders, the flagship company of Pharande Spaces and an ISO 9001-2000 certified company, is a pioneer in the PCMC area offering a diverse range of real estate products catering especially to the 42 sectors of Pradhikaran.

Home And Personal Loans To Cost More

The Reserve Bank of India (RBI) on Thursday hiked policy interest rates, sending a message to banks that they need to do the same for their loans. The silver lining is that interest rates on fixed deposits will also rise from the current 7-8% levels.

The RBI increased the repo rate (the rate at which it lends money to banks) by 25 basis points to 6% and the reverse repo rate (the rate at which the RBI takes out excess cash in the banking system) by 50 basis points to 5% with immediate effect.

The central bank did this primarily to contain inflation and to ‘normalise’ policy rates, considering the speed at which India’s economy is growing. Interest rate is a monetary tool used by central banks to ensure that a fast-growing economy doesn’t get out of hand — primarily, that prices of goods, or inflation, don’t spiral out of control due to excessive demand, the hallmark of fast-growing economies.

This is done essentially by controlling the amount of money floating in the economy by raising or lowering interest rates. When an economy declines, the opposite happens — central banks lower interest rates so that people are persuaded to buy goods and thereby generate demand.

“The RBI believes inflation has plateaued (and the declining trajectory inline with its projection), but it highlights that it will remain at ‘unacceptably’ high levels for a few more months.

It hence believes that there is a need for continued policy response to contain inflation and anchor inflation expectations,” said Ashutosh Datar, economist with the brokerage IIFL.

“The broad indication of the RBI action on Thursday is that lending rates will rise. We will take a call in a few days on increasing our personal and home loan rates because the impact of this rate hike will have to be passed on to consumers,” said Kamlesh Rao, executive vice president (personal loans and home finance), Kotak Mahindra Bank.

The timing of the hike will vary from bank to bank, depending on the cost of their money.

“On the interest rate scenario there is definitely an upward bias. But the hike may not be immediate. It will depend upon the credit pickup. Initially, it may be a hike of 25 basis points,” said MD Mallya, chairman and managing director, Bank of Baroda.

It seems both the RBI and the government want fixed deposit rates to rise.

“If bank credit is not to become a constraint on growth, real interest rates need to move in the direction of encouraging bank deposits,” the RBI said on Thursday.

On Wednesday, the government raised the employees provident fund rate by 100 basis points to 9.5%.

Banks had already resorted to hiking their benchmark prime lending rate, or BPLR, in August, citing reasons that their costs were going up. In the near future, they may hike it further and may even hike the base rate, which came into existence from July 1 this year.

“The BPLR may be hiked further as most of the lendings happen through it, and there is also the likelihood that the base rate may be hiked in the next quarter since banks have the option to change the base rate every quarter for the first year,” said Deepak Tiwari, banking analyst at KR Choksey Shares & Securities.

“Borrowing rates will go up for both consumers and developers,” said Shobhit Agarwal, Joint Managing Director (Capital Markets), Jones Lang LaSalle India, a real estate consultancy. Conversely, this could mean demand for homes, and therefore their prices, may decline.

“The projects that are already priced high, the impact in terms of demand erosion will be higher. We don’t see much impact on low-cost housing, that is Rs25-50 lakh purchases,” said Agarwal.

But teaser home loan rate — where you pay a low interest rate in the first year and more later — won’t be discontinued as they are a hot favourite among borrowers.

“I expect teaser loans to continue as they are so popular with people. But I think banks may continue those schemes with a slight increase in rates, said Harsh Roongta, CEO of apnapaisa.com, a personal finance advisory. The State Bank of India (SBI) is offering teaser home loans till September 30 and the committee will take a decision on whether to extend it further or not on September 28, said a senior SBI official.

RBI Pitches For Higher Deposit Rates

Unfortunately, banks look set to raise lending rates by October, too.

A day after the Employees Provident Fund Organisation trustees raised the interest rates on PF deposits by 100 basis points to 9.5 per cent, the Reserve Bank of India on Thursday signalled banks to raise deposit rates to attract investors who have been shifting to other instruments.

In its first ever mid-quarter monetary policy review, RBI said if bank credit was not to become a constraint to growth, real rates needed to move in the direction of encouraging bank deposits.

“The policy actions taken over the past three quarters were partly driven by the need to end the prevalence of negative real interest rates,” it said.

Interest rates are said to turn negative when the interest rate on deposits are lower than the prevailing inflation rate, eroding the value of depositors’ money. While inflation has been hovering in double digits, deposit rates have been in the range of 6-7.75 per cent in this financial year. As a result, banks have seen deceleration of deposit growth, as savers have been shifting to other instruments for higher returns.

Hinting at upward rise in deposit rates, S S Mundra, executive director of Union Bank of India, said: “There is a clear signal in the mid-quarter review of policy on deposit rates. There is probably need to rethink. The extent of revision would differ from bank to bank.”

Deposit growth has not exceeded 15 per cent since the second half of April, against RBI’s projection of 18 per cent deposit growth for the current financial year. Banks have mobilised Rs 44,396 crore in this financial year since April, while the incremental lending went up by Rs 1,10,996 crore.

Deposits grew 14.4 per cent year-on-year as of August 27. During the fortnight ended August 27, deposits mobilised by banks had gone up by Rs 38,658 crore.

Following the central bank’s cues from the first-quarter monetary policy review on July 27, as many as 40 banks had raised interest rates on short-term and medium-term fixed deposits by as much as 150 basis points. The central bank had asked banks to beef deposit mobilisation in the first-quarter policy review to avoid any asset liability mismatch.

Since March, RBI had raised the repo rates by 125 basis points this year to six per cent and the reverse repo by 175 basis points to five per cent.

Lending rates to rise

As a result of tight liquidity, home and auto loans are expected to go up but not immediately. Bankers expect the credit demand to pick up on the back of good monsoon and strong IIP (index of industrial production) growth in July.

“There is upward bias on lending rates since we have increased our deposit rates. We will revise rates when we review our base rate in October. There is definite indication for it go up and (this) depends on cost of funds,” said Bank of Baroda’s executive director, R K Bakshi.

Banks will review their base rate for the first time in October. Subsequently, interest rates for the home, auto and commercial sectors will increase.

“Banks are at the onset of the busy season. The credit pick-up would also shape the interest rate trend,” added Mundra.

“Borrowing rates will go up for consumers as well as for developers. For the projects that are already priced high, the impact in terms of demand erosion will be higher. We don’t see much impact on low-ticket sizes such as Rs 25-50 lakh purchases,” said Shobhit Agarwal, joint managing director – capital markets, Jones Lang LaSalle India.

“Tight liquidity scenario is expected to prevail, which will further strengthen the policy transmission and is expected to result in banks increasing their lending and deposit rates,” said Ashwin Parekh, partner, Ernst and Young.

By increasing the repo and reverse repo rates, RBI had further reduced the liquidity adjustment facility rate corridor to 100 basis points. This is expected to reduce volatility in short-term interest rates.

Credit had grown by 19.4 per cent on a year-on-year basis at the end of August 27 as against RBI’s projection of 20 per cent for the financial year. Outstanding bank credit stood at Rs 3351396 crore at the end of the fortnight.