Building a house, especially your own home, is a very special experience. Right from planning its architecture to laying the first foundation and designing its interiors, the joy, satisfaction and fun is inexplicable. The flipside being that it can be a very long drawn, tedious and expensive process. The more practical aspects of constructing a house involves a lot of responsibility, thorough research and in-depth planning. For most of us, paying home construction expenses up front can be a mammoth task, or absolutely impossible. Getting a mortgage might not be the most ideal thing to do, and can also be very tricky. In this scenario, the best thing to opt for is a construction loan.
A construction loan is offered by most leading banks for the purpose of construction of a house/residential property. With this loan you can get the financial assistance to construct your dream home on a plot owned by you. Banks insist that the land on which the house is being constructed must be owned by you.
A home construction loan is essentially a short-term loan that is applied for when the applicant is constructing a home on an empty piece of land. Home construction loans are unique. The funds released by the lender is determined by the stage of construction the home is in. The borrower is required to pay interest on only the money that he or she borrows and not on the whole loan amount.
The benefits of home construction loans are:
Differences between home loan and home construction loan are:
Leading banks offer home construction loan at affordable and competitive rates of interest. Usually, the Interest rate applicable is based on the respective bank’s Retail Prime Lending Rate (RPLR). This fluctuates from time to time and is primarily dependent on the money market conditions.
The standard tenure of this type of loan usually ranges from 1 to 30 years, though it may vary from each bank.
The standard eligibility criteria for availing a home construction loan are as follows–
Usually, most banks also have eligibility criteria based on the following factors -
The standard documents required for Home Construction Loan have been listed below. Please note, that some additional documents required may differ from one bank to another.
You can enjoy maximum tax benefit under the Home Construction Loan scheme. Though it may vary from one bank to another yet in a standard scenario, as per the current IT Rules, an exemption u/s 24 is Rs. 1.5 lakhs (this is for the interest amount paid in a financial year) and up to Rs. 1 lakh if the principal amount is also repaid in the same year. So, an amount of up to Rs. 2.5 lakhs is eligible to enjoy tax exemption. This can help you save approximately up to Rs. 70,000 of taxes, annually.
1. How does the applicant apply for a home construction loan?
The applicant is required to meet the loan adviser and fill out an application. In addition to it, the applicant must select the best construction option for him or her.2. What is the difference between construction loan and permanent loan?
An application for construction loan is solely submitted for covering the cost of construction of a home whereas an application for a permanent loan is submitted when a mortgage or a sum of borrowed money is to be paid off.3. When can the borrower start paying the principal amount and interest payment?
The borrower can start paying the principal amount and interest once the loan is converted from a construction loan to a normal one.4. Do banks allow the applicant to be the general contractor or builder?
No. Generally, the banks do not allow the applicant to be the contractor or builder.5. Can a home construction loan be locked?
The locking of a home construction loan varies from bank to bank.6. Can the financial institution from which the loan is applied for fund the deposit to the builder?
The funding of deposit to the builder will be provided by the financial institution or not depending on the terms of the loan, and if the financial institution’s policy permits.7. Is it mandatory for the applicant to insure the home before applying for a home construction loan?
Yes. The applicant must ensure that the home is insured when applying for a home loan construction.
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