When it comes to getting credit for managing expenses related to a housing property, there are as many as three distinct loan types that go into the picture – Land Loans, Home Construction Loans, and Home Loans. While Land Loans and Home Loans are relatively popular amongst the masses, not many people are aware of the concept behind a Home Construction Loan and its nuances. Let us take a quick look at the same.
|Lender||Interest rate (Min)||Interest rate (Max)|
|PNB Housing|| |
|Bank of Baroda|| |
|Bank of India|| |
|Union Bank of India|| |
|Axis Bank|| |
|Bajaj Finserv|| |
|Kotak Mahindra Bank|| |
A Home Construction Loan is primarily a short-term credit which is offered to individuals who plan on erecting a construction on an empty piece of land that they own.
Like in the case of every other loan, even Home Loans for Construction require the borrower to file an application with the bank complete with all the requisite documents. However, what makes this credit distinct from all others in this segment is the fact that the loan amount is disbursed in parts and not in full. Moreover, the interest is also charged only on the money used and not on the entire loan amount.
Here are certain features of a Home Construction Loan, which will help you in understanding the idea behind this loan:
More often than not, a Home Construction Loan is approved within a few hours of time, considering that the borrower has submitted all the requisite documents and enjoy a respectable credit score.
The loan disbursal process for a Home Construction Loan is as quick as the approval process, and the borrower can expect the amount requested to be drawn to reflect in their account in a matter of 3-5 days.
A vast majority of leading banks and online loan aggregators offer these loans at an interest rate starting from as little as 10% per annum. The rate usually varies depending on the numerous factors such as the borrower’s credit history, the policy of the chosen bank, the prevailing market rate, and so on.
In most cases, banks readily offer Home Loans for construction to salaried individuals, business owners as well as self-employed professionals, provided they can furnish proof of their employment as well as revenues and establish their ability along with their wiliness to repay the loan. Then again, most banks offer loans to people who are in the age range of 18-60 years.
While most banks charge a minimal processing fee towards the approval of this loan, they do not usually levy a prepayment charge on these loans. This makes it convenient for the borrower to repay the loan amount at the earliest possible, thus helping them save on the interest outgo. That being said, it is highly recommended that the borrower cross-checks the terms of the loan with the bank, before signing on.
A Home Construction Loan can be availed for a period ranging from 1 year to as many as 30 years, depending upon the loan amount and the repayment ability of the borrower.
A borrower can expect to get approval for up to 100% of the construction estimate; however, this is subject to verification by chartered engineer/architect and audit by the technical officer, appointed by the bank. More often than not, the upper limit for the loan amount is Rs. 30 Lakhs, although it may be extended if the borrower’s income and repayment ability show promise.
Now that you are aware of some of the underlying nuances of construction loans let us understand how this unique loan works.
The application process for this loan is rather standard and simply needs the borrower to submit the requisite documents, along with an estimate of the construction cost. If the repayment history of the applicant is good enough, the bank usually approves the loan within a matter of few hours. That being done, the lending institution then disburses a part of the agreed loan amount depending on the stage of the construction.
In most cases, the initial stages of development where the foundation and the basic structure built are more capital intensive as compared to the later stages.
In any case, you can expect to receive 1/3rd of the loan amount right at the beginning of the construction, while the full disbursement can only be scheduled once at least 75% to 80% of the development is rendered complete by the architect and/or the technical officer. Most banks require the borrower to present a completion certificate verifying the finishing up of each level of construction. Only after the certificate for a previous stage is filed, does the bank go ahead to disburse the loan amount for the next phase of construction.
As the names indicate, Home Construction Loan is the credit offered for undertaking the construction of a residential property, while Land Loans denote the credit extended towards the purchase of a plot of land. Here’s how these two loan types differ in various aspects.
The amount for construction loans is disbursed in parts, and the entire amount can be obtained only after 80% of the construction is complete, and an affidavit certifying the same is submitted. On the other hand, the entire loan amount for the purchase of land is disbursed in one go.
The Loan to Value (LTV) Ratio for construction loans can go up as high as 80% to 100% of the estimated costs, while the LTV for plot loans is rather less at just 50% to 70% of the market value of the land.
The tenure for construction loans can range from 1 to 15 years, while that for Plot Loans if often greater ranging from 10 to 15 years.
While one can only expect a loan amount of up to Rs. 30 Lakhs for home construction, the loan amount for purchasing a plot can be as high as Rs. 30 Crores, subject to the income of the borrower and their ability to repay the amount.
We hope that you now know all that there is to about Home Construction Loans, and how do these loans differ from Plot Loans. So, wait no more before you take your pick from Land Loans, Home Construction Loans, and Home loans, depending on the milestone you are at, on your way to building your dream home!
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