Mastering the home loan disbursement process: Things to know

Buying a home is a significant milestone in many people's lives, but it's also one of the most significant financial decisions you'll ever make. For most, a home loan is the only way to finance this big-ticket purchase. However, getting a home loan approved is only half the battle won. The loan disbursement process is equally important and often overlooked. 

Understanding the home loan disbursement process is critical because it determines how and when you receive the funds needed to purchase your dream home. In this article, we'll delve into the nitty-gritty of home loan disbursement and why it's crucial to understand the process. 

The home loan disbursement process

Understanding the home loan disbursement process is crucial to ensure that the loan amount is disbursed in a timely and hassle-free manner, enabling you to purchase your dream home without any delays or complications.

• Application and approval

The first step in the home loan disbursement process is to apply for a home loan. This involves applying to the bank or financial institution of your choice, along with relevant documentation such as proof of income, identity proof, and address proof. Based on their lending criteria, the bank will evaluate your application and decide whether to approve or reject it.

• Documentation and verification

Once your application is approved, the bank will ask you to submit additional documentation such as property papers, NOC (No Objection Certificate), and other relevant documents for verification purposes. The bank may also send representatives to physically verify the property's location, condition, and other details to ensure that the property meets the bank's standards and is worth the loan amount.

• Loan sanctioning

After verifying all the documents and other details, the bank will decide whether to sanction the loan. Before sanctioning the loan, the bank will consider various factors, such as the borrower's credit score, income, repayment capacity, and property value. Once the loan is sanctioned, the bank will issue a sanction letter outlining the terms and conditions of the loan, including the interest rate, tenure, and EMI.

• Disbursement of the loan amount

The final step in the home loan disbursement process is the disbursement of the loan amount. The bank will disburse the loan amount in instalments based on the construction progress of the property or as agreed with the seller/builder. The loan amount will be disbursed directly to the seller or builder's account, and the bank may also issue post-dated cheques to ensure a timely repayment.

Also read - Benefits of taking joint home loan

Types of loan disbursement

• Full disbursement

In this type of disbursement, the entire loan amount is disbursed in a single payment. This type of disbursement is usually used when buying a fully constructed or resale property. The full disbursement method is straightforward, and the loan amount is disbursed to the seller's account as a lump sum payment.

• Partial disbursement

Here, the loan amount is disbursed in instalments based on the construction progress of the property. The bank will conduct physical inspections of the property to ensure that the construction work is progressing as per the agreed-upon schedule before disbursing the next instalment of the loan amount. This type of disbursement is typically used for under-construction properties.

• Construction-linked disbursement

This type of disbursement is similar to partial disbursement, but the payment schedule is based on the construction stages of the property. The loan amount is disbursed to the seller or builder's account in instalments based on the construction stages of the property, such as the foundation, plinth, flooring, and completion stages. This type of disbursement is ideal for those who want to buy an under-construction property.

Knowing the different types of home loan disbursements is crucial because it helps you choose the right option based on your needs and requirements. For instance, if you're purchasing an under-construction property, a construction-linked disbursement plan may be more suitable than a full disbursement plan.

​​Factors affecting loan disbursement

• Property verification

The bank will physically inspect the property to verify its location, size, and condition. The bank may also verify the property papers and the title deed to ensure the property is free from legal disputes. The property verification process is crucial because the bank will disburse the loan amount only if the property meets its standards.

• Loan-to-value ratio

Loan-to-value (LTV) ratio is the ratio of the loan amount to the property's value. The LTV ratio is essential in home loan disbursement because it determines the loan amount the bank is willing to disburse based on the property's value. Banks in India usually offer up to 80% of the property value as a home loan, and the remaining 20% is expected to be paid by the borrower as a down payment.

• CIBIL score

The Credit Information Bureau (India) Limited (CIBIL) score is a three-digit number that represents your creditworthiness. The CIBIL score ranges from 300 to 900; a higher score indicates better creditworthiness. Banks in India consider the borrower's CIBIL score while sanctioning the home loan because it indicates the borrower's ability to repay the loan amount.

• Other loan eligibility criteria

The bank may consider other factors such as the borrower's income, age, employment status, and repayment capacity while sanctioning the home loan. The bank may also consider the borrower's existing loan obligations and calculate their debt-to-income ratio before deciding on the loan amount to disburse.

Understanding the factors that influence home loan disbursement is essential because it helps borrowers prepare adequately and improve their eligibility for a home loan. Borrowers can improve their CIBIL score, ensure that their property documents are in order, and maintain a good debt-to-income ratio to increase their chances of getting their home loan sanctioned and disbursed.

Precautions to take during loan disbursement

• Ensure property verification

Before signing the loan agreement, ensure that the bank has physically inspected the property and verified its location, size, and condition. Also, ensure that the property papers and title deeds are clear and free from legal disputes.

• Check the loan agreement

Read the loan agreement carefully and understand the terms and conditions of the loan, including the interest rate, tenure, repayment schedule, prepayment charges, and foreclosure charges. Ensure no hidden charges or clauses in the loan agreement could impact your financial obligations.

• Know the disbursement schedule

Understand the disbursement schedule and ensure that the bank is disbursing the loan amount as per the agreed-upon stages or construction milestones. This will help you plan your finances and ensure the construction work is progressing per the schedule.

• Ensure the proper use of funds

Ensure that the loan amount is used only for the purpose for which it was taken. For instance, if you have taken a loan to buy a house, ensure that the loan amount is used only for that purpose and not for other expenses. This will help you avoid any legal or financial issues in the future.

Also read - 5 Features of floating or variable home loans

​​Conclusion 

Understanding the nuances of the home loan disbursement process is the key to unlocking the door to your dream home. It is important to be aware of the different types of disbursement, the factors that affect eligibility, and the precautions to take during the process. Understanding these aspects can help you easily navigate the loan application process, ensuring a stress-free and successful outcome.

Looking to fund your ideal home and need financial assistance? IDFC FIRST Bank Home Loan may be the solution for you. Get the best interest rates on housing finance, a wide selection of property options, benefit from higher loan eligibility, and more. With a completely digitised process, your dream abode becomes closer than ever. Apply now!

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