Why getting a larger loan amount sanctioned is more beneficial for you!

If you are hunting for a property purchase, it might be a good option for you to get a larger loan pre-approved. Many people spend a lot of time and effort shortlisting their desired property only to find out later that their eligible loan amount is insufficient for the purchase. A home loan that is approved prior to your purchase or shortlisting of your property not only gives you the freedom to shop for any property with a definite price in mind, but comes with additional advantages.

Let's break down why a large loan amount is useful:

One big advantage of getting your home loan pre-approved is that you can get a higher loan amount sanctioned as per your financial credentials. For example, if your financial credentials, including your income, eligibility criteria, and credit score are sound, and the bank offers you a pre approved loan of Rs. 50 Lakh, you can purchase any property even if it is lower than the offered amount. Therefore, if your bank pre-approves a loan of upto Rs. 50 Lakh and you end up taking a home loan for Rs. 40 Lakh, you can use the remaining Rs. 10 Lakh in the future should you need it. It also increases your chances of getting a top-up loan after 6 months. More importantly, it saves you the extra hassle of enhancing your loan amount at a later stage of construction in case there are some unforeseen expenses.

Late activation of OCR yardstick:

OCR or Own Contribution Receipt, is the contribution you make to the builder or seller towards the sale consideration. Since banks do not finance the entire cost of the property, you need to pay some percentage of it from your own resources depending on the Loan-To-Value ratio (LTV). When disbursing loans, banks sometimes use OCR as a yardstick for future disbursements. This is especially true for an under construction property, as banks will only disburse the loan if your OCR matches the bank's disbursal. For instance, if you pay only 60% of your required OCR while the bank has disbursed 70% of the loan, it will not disburse further loan unless your OCR matches the bank’s contribution. Therefore, with a higher loan amount pre-approved or sanctioned, the OCR yardstick would kick in at a later stage of construction or payment schedule specified by the builder. This means you do not have to worry about paying a large amount from your own pocket to the builder until late into the payment schedule.

Pros of pre-approved loans:

1. Faster processing once you shortlist the property: Once you have a pre-approved home loan, you can apply for a loan the moment you finalize your property. This means no more dilemmas over whether your loan application would be approved or rejected. In cases where you have approached the bank for a loan, the sanctioned amount functions similarly as a safety net for your purchase and funding plans.
2. Hassle-free disbursals from lender: Since the OCR yardstick for loan disbursals kicks in at a later stage of construction when you opt for a larger sanctioned amount, not only are your payments to the builder taken care of, but also you retain your own funds which could be invested in financial products that yield more interest than what your lender charges on your home loan. Thus, this could represent an additional source of income.
3. Useful as a bargain tool for better deals: You can use your larger loan as a bargaining tool with the builder. Usually, builders like to expedite the sale of their property; hence, dealing with a buyer having a pre-approved loan makes the process easier and faster. The builders may even offer you a discounted price since you have a pre-approved loan in place, which guarantees, to an extent, future payments as per the builder’s payment schedule.

Some disadvantages of getting a larger loan sanctioned are:

1. No Guarantee of final loan: Pre-approved loans do not come with a guarantee that you will get a home loan when you apply for one. The bank will evaluate the property and the builder and approve only when satisfied with the legal and technical aspects of the property.
2. Interest rates are indicative: The interest rates of your pre-approved home loans are indicative at best. The interest rates may differ when you take the disbursement of the loan if the bank changes the rates in the mean time.
3. Processing fee is non-refundable: Should you choose not to take up the entire approved home loan, or your property purchase is postponed due to some reasons , you are not entitled to any refund of the processing fee or the excess processing fee taken for the loan.
4. Upfront EMI outgo: If the lender does not have the option to calculate EMI based on disbursed amount rather than on the sanctioned amount, and if you do not wish to go for the pre-EMI option, then your initial EMIs based on a larger sanctioned amount will be huge compared to the case where your sanctioned amount was just enough to cover your actual requirement.

Getting a pre-approved loan is beneficial as it gives you flexibility to make a hassle-free purchase. Getting a larger loan amount pre-approved offers additional advantages that can make your housing property purchase that much smoother.