Banks' main source of earning is the interest they earn from money lent. The more they lend the more the interest earning, subject to no defaults.

To enhance their earning, banks are in constant lookout for customers with good credit history whom they can lend with minimum default risk.

In this process, they pre- approve home loans for potential borrowers based on their creditworthiness. Taking a pre-approved home loan can offer you various benefits as under:

Quick Processing Time

Bank is done with your due diligence. Only property due diligence is left which makes the process faster.

Less Hassle while borrowing

As you are an old customer and bank has already approved the loan, there are less hassles and documentation efforts.

Better Bargaining Power

Once you visit the home seller with pre approved loan amount, he sees ready cash coming his way and can offer you a better deal. Bargain well while dealing with the seller.

Buyer can focus on selecting home

As loan approval hassles are out of sight, now you can focus on selecting home as per your choice. Time involved in loan processing can now be spent in better site selection

Disadvantages

Mismatch between need and amount borrowed

As loan amount is pre-determined by the bank, it might not be in sync with the buyer's requirement.

Spend it psychology

Once you get the pre approved loan amount, "spend it" psychology comes to play. You get in a hurry to buy home which might decelerate the due diligence effort. Availability of easy money may prompt you to invest in costly options.

There might be other economical options

Getting a pre approved loan stops you from exploring other cheaper options. There might be more economical offers from other banks.

The author Bimlesh Singh is a financial advisor. He holds a Bachelor's degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com

Courtesy:investmentyogi.com