Home Loan Sanction Vs Disbursement: What's The Difference And Why It Matters

A home loan can be among the biggest financial commitments in your life. For most, it is the sole way of acquiring a house. However, while borrowers are keenly interested in interest rates and EMIs, they overlook two extremely important stages of the loan cycle—sanction and disbursement. Though they may have similar-sounding names, they perform completely different functions. Being aware of the difference can make a big difference to your home purchase experience.

Loan sanction is the moment when your application, in principle, is approved by the lender after checking your repayment ability, documents, income, and credit history. Disbursement is when the bank actually disburses the sanctioned amount of the loan, or part of it, to the seller or the builder.

What Happens During Sanction

Loan sanction is the formal approval by the lender that you are eligible for a specific amount of home loan. Once you submit your documents—ID proof, address proof, income information, and property-related documents (if already shortlisted)—the bank assesses your financial profile.

If you are eligible, the bank will issue a sanction letter. The letter mentions the sanctioned amount, loan tenure, interest rate, EMI, and other conditions and terms and conditions. It is normally valid for a limited time period—normally 3 to 6 months. If you have not finalised a property yet, this letter helps you to create a clear budget. But this is not an assurance of receiving funds until other conditions are completed.

What is Disbursement

Disbursement refers to the release of funds in lieu of the loan. This happens when all the documents, i.e., the documents of the property as well as the legal clearances, are verified and cleared by the bank. Based on the construction stage, disbursement either happens once (in case of ready-to-move properties) or in stages (in case of under-construction properties).

The amount is debited to the property seller or builder directly. Disbursement is subject to the completion of all technical and legal formalities, including signing the loan agreement and furnishing the registered sale agreement or builder-buyer agreement.

How Sanction Differs From Disbursement

The sanction stage is loan sanction based on your financial profile. Disbursal, however, does not just rely upon your profile but also upon the technical and legal position of the property. A sanction letter does not mean the money has been received by you; it only states the amount of money the bank sanctions for you.

More borrowers have the idea that once they get their loan sanctioned, they can proceed with the purchase. But if the documents of the property are not clear or the builder lacks necessary sanctions, the bank may postpone disbursement.

Steps Between Sanction and Disbursement

Following receipt of the sanction letter, subsequent steps involve property selection (if not previously completed), filing all documents pertaining to the property, and securing the bank's legal and technical clearances. A legal department confirms the title deed, ownership history, and if the property conforms to local law. A technical department inspects the property to confirm its valuation and construction stage.

Once both sides have agreed, the bank signs off on the final loan agreement. The bank prepares a disbursement schedule. For constructions, money is paid out in instalments against construction progress, which the bank verifies at each stage.

Why the Distinction Matters

Identifying sanctions with disbursement can have crucial implications. Suppose you execute the sale agreement in the assumption that the bank will disburse the entire loan at one go, but later find yourself facing disbursement delays due to incomplete documents from the builder. You might miss payment dates, which may invite penalties or even cancellation of your booking.

Also, if the bank undervalues the property, disbursement can be below the sanctioned value. In that case, you will need to raise the shortfall yourself.

Having a clear comprehension that sanction and disbursement are separate stages helps the borrower plan better. It helps the borrower have realistic timelines and prevents the borrower from committing until they have determined all the requirements are in place.

Loan Planning

It is natural for a first-time buyer to get thrilled about having the loan sanctioned and assume the same as the ultimate nod. Yet, the real milestone is the disbursement. It is most important to make sure your property is legally in order, all clearances have been completed, and the builder is reputable. This will guarantee better possibilities of successful disbursement.

A home loan is a multi-step process, and each step is used for a specific purpose. Sanction gives you a loan offer based on your financial profile, while disbursement is the actual disbursement of funds based on your profile and the property's condition. Treating them as separate and crucial phases can avoid delays, legal troubles, and money burdens. As usual, read all of this very carefully, remain in contact with your lender, and consult a financial adviser if unsure.