You've spotted a house and lot on sale for a very good price. Lest someone else gets it first, you decide to book it right away and secure a loan later. To your disappointment, your bank rejects your mortgage request.
What's worse, the real estate guy refuses to return your booking fee, so you don't just miss out on your dream home, you also lose a good amount of cold, hard cash.
A smarter way to go about this would have been to approach a lender for a pre-approved loan. This way you will avoid making impulse or emotional decisions that you may regret later.
Loans are pre-approved mostly for mortgages, but borrowers can also get personal and car loans approved in advance.
Essentially, a pre-approved loan is one that is granted in advance, or even before the borrower finds the item or need for it. It basically provides some kind of assurance that the buyer has the necessary funds to make the purchase.
So, when you shop around, you already have a clear budget in mind and you know for sure whether you have enough spending power to bring home that vintage furniture being auctioned off. And when it's time to haggle for a better offer, you will definitely be in a good position to bargain.
When you secure a pre-approved loan, the bank will review your credit history and financial health. If the bank is convinced you can repay the amount you apply for, it will approve your application, but it doesn't mean you will get the funds right away. Instead, you will get a "pre-approval letter", which will demonstrate your borrowing capacity. You can then start shopping for your desired home, car or furniture and show the letter to the sales agents.
Some banks in the UAE offer pre-approved loans to customers who have above-average monthly income, say at least Dh18,000. If you are interested and think you are qualified, all you need to do is submit an application form, along with the required identity and income documents, such as your passport and visa copy and bank statements. But before you run to a lender to get a pre-approval, it is important to keep some important points in mind.
Like any other bank request or transaction, a pre-approved loan application requires a pre-approval fee of at least Dh1,000. Additional fees may also be collected at the time of loan disbursement, such as the "final approval fee", which is one per cent of the loan amount, capped at Dh40,000 at some banks. At Emirates NBD, the total processing fees, including the Dh1,000 pre-approval fee, is one per cent of the approved loan amount.
Getting a pre-approval for a loan doesn't mean you are guaranteed to get the money. Pre-approvals in the UAE have a lifespan of a little over a couple of months. At Emirates NBD and Mashreq, for example, the pre-approval for a mortgage is valid for a duration of 60 days and if you don't find the house you want within that period, you will have to refresh your application.
"Upon completion of 60 days, if the loan is not availed of, the pre-approval will expire," said Shekhar Krishnamurthy, head of retail assets and liabilities at Emirates NBD.
Additional fees after expiry
If you need more time to shop around and the pre-approval expires, you can re-apply or "revalidate" your application, submit a new set of documents and pay fees.
"If the customer comes back post the expiry of the pre-approval, the customer can apply for revalidation after providing some additional documentation. A nominal revalidation charge of Dh500 shall apply," said a Mashreq spokesperson.
"[During a revalidation], the bank may ask for additional or fresh sets of documents," added Krishnamurthy. Emirates NBD, however, assures that their customers "will have to pay fees only once".
No absolute guarantees
Now that you're aware of the validity, you will of course ensure a purchase decision is reached within the time frame set by banks. However, if the unfortunate happens, say you lose your job or get a salary cut, there's a possibility your lender may cancel the pre-approved loan or amend the loan amount and interest rates.
"The loan may be withdrawn in the case that there has been any change in the applicant's circumstances, such as employment, income, liabilities or any other details provided at the time of application," saidKrishnamurthy.
Mashreq insists it sticks to the terms of the pre-approval letter. "However, if the customer and bank agree, the terms can be revisited when the customer avails himself of a final approval from the bank."