Building a house of your own is everybody’s dream. But it requires lots of planning, from designing its architecture to laying the first foundation, constructing from ground up and designing its interiors. Apart from the planning, another important thing which is required for the construction of a house is money. A Home construction loan can help by providing financial assistance to construct own house. Home construction loans are a bit different from the general home loans and many of us are not aware of it. Let us understand Home construction loans.
What are Home Construction Loans?
A Home Construction Loan is generally a short-term loan which provides financial assistance to the people to construct or build their dream house over an empty plot of land. Home construction loans are different from any other loan as the entire loan amount is not disbursed at once. The borrowers have to pay interest only on the amount they use and not on the total loan amount. To avail this loan, it’s important that the land on which the house is being constructed must be owned by the applicant.
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Important Things about Home Construction Loan
Loan Disbursement Happens in Instalments
In a home construction loan, the disbursement of the loan amount is not done at once or in a lump sum. The complete loan amount is disbursed in instalments which depends on the construction process of the house. Generally, the complete loan amount is disbursed in 4 to 5 instalments. So, if you apply for a home construction loan you need to have some amount of money with yourself to purchase raw materials so that the construction work does not stop.
Disbursement is According to the Construction Process
Banks have a pre-decided standard for the disbursements which is decided on the construction processes. For example, if a person takes 85% of the total estimated construction cost as a loan, he/she will get 15% of the loan amount after the foundation construction work, this will be the first instalment of the loan. The second instalment will be disbursed for the linter level construction and third and fourth after that depending on the construction work. Similarly if one takes 50% of the total estimated cost as the loan amount then he/she will get the first instalment after the half construction work is completed. The interest is payable only for the money disbursed not for the full borrowed amount.
Limited Tax Benefits
Unlike home loans where one can avail tax exemption on both interest and principal amount, for a home construction loan one will get tax exemption only for the interest paid if the construction activity is ongoing.
This means, if you start paying your EMI after the first instalment, you will not get a tax exemption on the principal amount paid against the loan until the construction gets over and the bank certifies that they have disbursed the full loan amount to the borrower.
After the construction work is over one can avail a tax exemption up to 1 lakh on the principal amount and a tax exemption of 1.5 lakh on the interest paid every year till the whole tenure.
The down payment for a home construction loan is usually higher than a normal home loans as the disbursal depends on the level of construction. If INR 10,000 is required at the initial stage of the construction, the bank may fund only INR 3,000. The remaining part of the money has to be arranged by the borrower.
Interest Rate and Tenure
The tenure of Home construction loans generally ranges from 12 to 15 years. Banks mostly charge a floating rate of interest on this loan. Compared to other loans construction loans has a higher spread. However, comparing different lenders for the interest rates is very important before one settles down for a particular lender.
The standard eligibility criteria to avail a home construction loan may vary from bank to bank but generally, they are dependent on the following factors-
- Monthly Income
- Educational Qualifications
- Number of dependants
- The organization in which the applicant is employed
- Repayment capacity
- Income of the co-applicant if any
One can apply for a home construction loan either individually or jointly with a co-applicant. All the co-owners of the property have to be co-applicants. But it is not mandatory that all the co-applicants be co-owners of the property.
Salaried and self-employed individuals both are eligible for a home construction loan.
Some banks also offer home construction loans to NRIs too.
A home construction loan is a boon for those who want to live in a house which has been made as per their likes, instead of living in a condo built according to the builder. A proper research before applying with a particular lender can help save someone from all the unnecessary hassles and the process can be a smooth one without any surprises.