Home construction loan: How to get a home loan for construction of your own house

[ecis2016.org] While people can avail of home loans to get their own house constructed, the process of approval and disbursement of such a loan, is different from that of a regular housing loan

In addition to borrowing funds for the purchase of a ready-to-move-in house or for booking an under-construction property, you can also avail of home loans to get a house constructed on a plot. Such loans are commonly termed as construction loans and are provided by all leading financial institutions in India.

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Also be mindful of the fact that home construction loans are not the same as home loans and plot loans. Apart from their different pricing, these three types of loans also have varying terms and conditions. There is also a difference in the repayment tenure.

The process of approval and disbursement of a construction loan is slightly different from that of a regular housing loan.

Loan for home construction

Home construction loan: Eligibility criteria

For getting a loan for home construction, the applicant must fulfill the following criteria:

• Age: 18 years to 65 years.
• Residential status: Must be an Indian or non-resident Indian (NRI).
• Employment: Self-employed and salaried individuals.
• Credit score: Above 750.
• Income: Minimum income of Rs 25,000 per month.

Documents required

In addition to the regular ‘know your customer’ (KYC) and income documents, to avail of a home loan for constructing a house on a plot of land owned by you, you will have to provide the prospective lender with all the relevant documents that establish your title and ownership of the plot of the land. The plot of land can either be a freehold land / plot, or it can be allotted by any development authority, like CIDCO, DDA, etc. You can also avail of a loan on a leasehold land, where the lease is for a reasonably long period of time. You will also have to submit a no- encumbrance certificate pertaining to the property.

In addition to the documents of the plot, you will have to submit the plan and layout of the proposed house, duly approved by the local municipal authority or gram panchayat. You will also have to submit an estimate of the cost of construction, which has been certified by a civil engineer or an architect. Based on these documents, if the lender is satisfied about your overall eligibility and the estimate of the cost submitted by you, it will sanction the home loan subject to the usual terms and conditions.

Margin money

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As with any other home loan, the borrower will have to contribute the margin money towards construction of the house, depending on the amount of home loan that is requested. While calculating your contribution, the cost of the plot is also taken into account, in case the same has been purchased recently. However, the value/cost of the plot is not taken into account while computing your contribution, in case the same has been inherited by your or is received as a gift or if it was purchased long back.

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Disbursement of the loan

The disbursement of the construction loan is done in parts, and the money is released, based on the progress of the construction, similar to the process followed when an under-construction flat is booked with a developer. However, the lender will not disburse any money till you bring in your own contribution as agreed and provide proof of the same. For availing disbursements from the bank, you will have to submit photographs of the house and certificates from an architect or civil engineer about the stage of completion of the house.

The lender may rely on the certificate and photographs submitted by you, or it may decide to depute its own technical person to verify the same. So, if the construction is completed quickly, the disbursement of money by the lender will also be faster.

Leading lenders like SBI, HDFC Ltd, ICICI Bank, etc., are active in the construction loan segment. However, not all the lenders that provide home loans, will also provide construction loans. Some lenders are not comfortable funding such self-constructed properties.

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SBI home loan for construction

Public lender SBI provides ‘Realty Home Loan’ for the purpose of home construction. You can also get the loan for construction of house on a plot financed under SBI Realty. Those taking the loan have to ensure that the construction of the house takes place within five years from date on which the loan has been sanctioned.  The maximum amount of loan that can be offered to a customer can range up to Rs 15 crores, with a repayment period of 10 years.

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HDFC home construction loan

Private lender HDFC also provides loans for home construction on freehold, as well as leasehold plot, or on a plot allotted by a development authority. Currently, the lender is offering construction loans at 6.95%. However, the borrowers will have to meet several conditions to get the best rate on construction loans.

Please note here that home construction loans are not the same as plot loans. At HDFC, plot loans are a different product. Rates on plot loans are different from home construction loans. The paper work involved in the two loan applications is also different.

Things to remember

Borrowers who plan to get a construction loan, should know that not all lenders provide loans in this category. So, check on the bank’s website first, whether they offer constructions loans, before you proceed to their nearest branch. Another point that borrowers should be aware of, is that banks do not disburse the entire loan amount in one go and might provide you the money in tranches, depending on the progress of the construction work.

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Factors to consider before applying for a home loan

There are several factors one needs to consider, before applying for a home loan.

• Calculate the EMI: Individuals applying for home loans need to pay an EMI that consists of the principal amount and the interest rate. It is crucial to calculate the EMI one needs to pay and compare the same with their income. Such an evaluation helps in understanding whether the individual is capable of repaying the loan with his given income.
• Interest rate: There are several kinds of loans and their interests differ. The longer the tenure, the greater is the interest paid. Thus, the individuals should efficiently choose the right tenure and the interest rate, so that they can repay the loan without any financial burden.
• The right institution: There are a number of financial institutions that provide loans for purchasing or constructing a new home. It is important for individuals to choose a secured and credible institution, to have their loans sanctioned.

(The author is a tax and investment expert, with 35 years’ experience)

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