Factors to Consider Before Applying for a Home Construction Loan

A home construction loan is different from a Home Loan. Borrowers avail of Home Loans to either buy a ready-to-move-in property or an under-construction one. Home construction loans, on the other hand, are availed of by those borrowers who wish to build their own homes. In the case of a Home Loan, the lender generally disburses the entire amount in one go. However, in the case of home construction loans, the lender releases the amount in phases. Further, availing of a home construction loan requires one to submit a construction plan along with completion timelines and budget. This article aims to apprise readers about home construction loans, the procedure involved, the home construction loan interest rates and the factors to consider while applying for one.  

Also Read: 6 Point Differentiation Between Home Loan Vs Home Construction Loan 

7 Things to Consider While Applying for a Home Construction Loan

The Money Will Come in Phases

As mentioned before, when it comes to home construction loans, the lender does not sanction the entire loan amount in one go. Instead, the money is released in bits and chunks based on the construction phase you have completed. The good part about this arrangement is that one does not have to deal with a large sum at any given time – money comes when you need it and therefore, borrowers feel compelled to spend it cautiously.  

You Cannot Change Your Construction Loan

To be able to avail of a home construction loan, you will be required to submit a detailed construction plan along with completion timelines and the budget required. Your lender will sanction you a loan based on this plan and once the loan has been finalized, you won't be able to change the construction plan.  

Therefore, before applying for a home construction loan, borrowers must sit with a designer and come up with a final plan after proper deliberation and planning.  

You Won't Get a Long Tenor to Repay the Loan

Lenders give borrowers the flexibility to opt for long tenors stretching up to sometimes 32 years in the case of Home Loans. However, in the case of home construction loans, borrowers generally get a short tenor to repay the loan. In any case, you can use a home construction loan EMI calculator to understand your EMI obligation with respect to the loan amount you have availed of. This will help you plan repayment in a better way.

You Can Avail of Tax Benefits on a Home Construction Loan

Here's another good news – under the Income Tax Act, one can avail of tax benefits on home construction loans. Under Section 80C of the Income Tax Act, one can claim tax deductions up to a maximum of Rs.2 Lakh* on payments made towards interest repayment and under section 24B of the same act, one can claim tax deductions up to a maximum of Rs.1.5 Lakh on payments made towards interest repayment. Over and above this, first-time home buyers can also claim an additional deduction of up to Rs.50,000 under section 80 EE of the Act.   

Home Construction Loan Balance Transfer

Most borrowers do not know this – just like lenders offer a balance transfer facility on Home Loans, they also offer a balance transfer facility for home construction loans. If you think your current lender is charging you a very high-interest rate and another lender is willing to offer you a better deal, you can transfer your home construction loan to the new lender. Please know that this would require you to pay a balance transfer processing fee, which is usually 1% of the total loan amount. Therefore, one should opt for a home construction loan transfer only when the difference in interest rate is big enough to compensate for the high home construction loan balance transfer fee. 

Eligibility and Documentation Requirements

Just as in the case of Home Loans, home construction loans are also sanctioned only when a borrower meets a lender's eligibility requirements. Most lenders require borrowers to have a stable job as well as a stable source of income to be eligible for a home construction loan. Age requirements vary between 21 and 65**. Further, borrowers must have an excellent score.

Apart, to ensure a smooth home construction loan application process, keep all the required documents handy with you. You will need mandatory documents (PAN card or Form 60), KYC documents, income documents, a detailed construction plan along with budget and timelines, etc. Go to your lender's website and check their home construction loan eligibility and documents required before applying to ensure a smooth loan application process.  

Higher Interest Rate

Here is the most important thing to keep in mind – home construction loans draw higher interest rates than Housing Loans. Though these loans are not very expensive, they are also not as affordable as Home Loans. As of now, home construction loan interest rates vary between 8% and 15%*. The final interest rate that you will be offered will depend on several factors, including your credit score, age, income stability, etc.   

How to Apply for Home Construction Loan?

Follow these steps to apply for a home construction loan:  

• Go to the website of the lender from whom you wish to avail of the home construction loan.  
• Open the Home Loan construction application form on their website. 
• Fill the form with personal and professional details, such as your name, age, gender, area pin code, monthly income, etc.
• Fill out the form and someone from your lender's team will connect with you and explain the remaining steps of the process.  

A home construction loan is an easy way to get access to ample funds to build your own home. Home construction loan interest rates are affordable and therefore, paying off these loans is easy. 

Also Read: Home Loan vs Construction Loans 

**The age eligibility criteria may vary.