The adventure of building your dream home is exciting, but funding it needs careful planning. If you’re planning to build a house, a home loan for construction may be best choice and here’s all you need to know to make an informed decision.
What is a Home Loan for Construction?
A home loan for construction allows you to fund the construction of your house in phases, making the money available as the work progresses. Unlike a standard home loan that is often disbursed as a lump sum to purchase a ready property, a home construction loan is linked to the actual completion of your project. Disbursing funding in phases is essential for people building a custom home, as this way they can use their budget wisely.
How Does a Loan for Construction of House Work?
Let’s go over how a home loan for construction works:
1. Loan application
You begin by completing an application that outlines your proposed construction plan and estimated construction costs.
2. Disbursement in phases
The lender disburses the money in phases that are aligned with specific construction milestone events, such as foundation, walls, roofing, and finishing. You may need to provide documentation to show that the milestone has been completed to get further funding.
For example, if your total construction cost is ₹50 lakh, the lender may release 20% for the foundation, 30% after the walls are built, and the remaining 50% upon completion of roofing and finishing.
3. Repayment
Since the disbursement is in phases, you pay interest-only EMI during the initial period. Once the construction is complete and you have possession of the home, full EMIs will begin as the entire loan amount would be disbursed.
What are the Key Benefits of Taking a House Construction Loan?
- Flexibility in funds: Access funds in phases according to the construction’s progress.
- Tax benefits: Interest amount can be eligible for deduction u/s 24(b) or 80C.
- Customization freedom: Build your new home according to your design.
- Building equity faster: As construction continues, your property’s value will increase.
What are the Current Construction Loan Interest Rates?
Home construction loan’s interest rates are determined by several factors, including lender’s policies, your credit profile, and current market situation. Some leading financial institutions like PNB Housing Finance offer competitive rates that make the loan affordable.
Who is Eligible for a Loan for House Construction?
- Individuals between 21 and 65 years of age.
- Stable income, whether salaried or self-employed.
- Clear property ownership documents.
- Approval of detailed construction plan.
Lenders may also have other criteria and will also evaluate repayment capacity, past credit history, and property location before sanctioning the loan.
Documents Required for a Home Loan for Construction
- KYC documents: Identity and address proof.
- Ownership documents of the property: Title deeds and approved building plan.
- Proof of your income: Pay slip, bank statement or income tax returns.
- Construction plan approval: Approved blueprint issued by local authority.
Common Challenges in Getting a Loan for Construction of House
- Approval lags due to document verification.
- Land titles verification errors.
- Insufficient credit score, income, or not meeting other criteria.
How to Choose the Right House Construction Loan?
- Perform a comparative search of lenders and interest rates.
- Decide between fixed or floating construction loan rates.
- Plan the EMIs and duration according to your cash flow.
Tools and Calculators to Plan Your Construction Loan
- Take the help of a home loan EMI calculator to estimate your repayment.
- Use eligibility calculators to determine your borrowing ability.
- Use budgeting tools to efficiently track the overall costs.
Custom building a home is much easier when you have a clear financing plan. But before you apply for a home loan for construction, you need to check your financial capacity, have the right documentation, and use online tools to plan your finances. Choose a professional financial institution like PNB Housing Finance that can assist you throughout the process, turning your vision into reality.
Anantha Nageswaran is the chief editor and writer at TheBusinessBlaze.com. He specialises in business, finance, insurance, loan investment topics. With a strong background in business-finance and a passion for demystifying complex concepts, Anantha brings a unique perspective to his writing.
