When banks process home loan applications, they apply several benchmarks to decide a borrower’s credit-taking capacity. As your application moves from one level to another, banks communicate this through various documents. The most common documents are sanction, disbursement and in-principle approval letters. In this guide, we will try to understand the difference between these three documents.
Home loan sanction letter
Once a borrower looks worthy enough for credit based on his income-generating capacity, banks would communicate this through a home loan sanction letter. To arrive at this decision, banks scan your identification documents, address, account details, credit score and financial history.
What makes a borrower worthy of getting credit in the eyes of banks? Well, surety for the repayment is what a bank is looking at, so they typically try to gauge your repayment capacity, as well as your repayment intent (through credit history). If they are satisfied on both the parameters, you will receive a sanction letter from the bank.
Valid for a specific period (this could be up to six months), the home loan sanction letter needs to be acknowledged and accepted by the borrower for the bank to proceed further with the loan sanction process.
See also:Â Sanction letter importance and its role in getting a home loan
Details required in home loan sanction letter
The home loan sanction letter would typically have the following details:
- Sanctioned amount
- Repayment tenure
- Repayment mode
- Interest rate
- Interest rate type: fixed or floating
- Tax benefits
- Terms and conditions
Home loan disbursement letter
After banks conduct the legal and technical verification of the property to be purchased by the borrower, they may or may not be able to issue the loan amount.
This is because banks generally issue only 80% of the property value as home loan.
This means that even if your repayment capacity allows you to repay a home loan worth Rs. 50 Lakh, the bank will not offer you Rs. 50 Lakh as home loan for a property worth Rs. 55 Lakh. If the bank maintains a loan to value ratio of 80%, you will get only Rs. 44 Lakh as home loan for the property.
At this stage, the bank may revaluate the loan amount and communicate this through the disbursement letter.
Home loan agreement
Once the bank and the borrower reach an agreement about the final loan amount, the lender would finally draft a home loan agreement document, mentioning every small detail.
