What You Should Know about Home Construction Loans

What You Should Know about Home Construction
Loans

Most people avail a Home Loan to purchase a ready-to-move-in apartment or one that is still
under construction. You can avail a special Home Construction Loan if you want to construct your
own house. However, the process of approval and disbursement are different as compared to a
regular Home Loan application. Read on to know more.

What is a Home Construction Loan?

As the name suggests, a Home Construction Loan is a loan that is used to pay for the cost of
constructing a home. You can construct a home by yourself or hire a contractor but you need to
own the plot of land it’s being built on. A H​ ousing Construction Loan​ pays for the construction
only and nothing else.

Qualification for a Home Construction Loan

Not all banks and NBFCs are keen on offering a housing construction loan. One major reason
behind this is the fact that the bank or NBFC needs to place a lot of trust on the builder. They lend
you the money with the assumption that the house will have a certain value after the
construction is complete.

Most banks and NBFCs have strict qualification norms and some of them include:

Involvement of a qualified builder

It’s difficult to get Home Construction Loan approved when you plan to construct the house
‘yourself’, and you aren’t a licensed and qualified builder yourself. Hiring a general contractor and
showing the blueprint of the construction increases the chance of loan approval.

Margin Money

As with other Home Loans, you’ll need to shell out the initial margin money towards the
construction of your home and this amount is usually more in case of building a new home. This
minimum amount varies from one lender to the other, and it depends on the amount of your loan
amount.

Specific Details

In order to get your loan approved, you need to provide your lender with specific details—floor
plan and the basic framework of your house.

Since the qualification criteria are different from a regular housing loan, the approval process is
different as well. Here’s a list of the documents that you’ll need to submit.

Documents Required

When you apply for Home Loan, documents that you need to furnish include your three months’
salary slips, your bank account system, identity proof, photographs, and KYC documents. When
you apply for a construction loan, you’ll need to attach all the relevant documents in order to
establish your right and ownership on the plot of land, you’re planning to build your home on. It
can be a freehold plot or it can also be allotted by a development authority of India like DDA, or
CIDCO. It’s also possible to avail a home construction loan on a leasehold land, provided the lease
is for a very long period of time. You’ll also need to provide your prospective lender with a
no-encumbrance certificate pertaining to the land you hold.

Apart from KYC, income, and plot documents, you’ll also need to submit a proposed house plan,
and the layout which has been approved by the local municipal authority. Along with that, you
also need to submit a cost estimate for the construction, one which has been certified by an
architect or civil engineer.

After you submit the documents, and only if you fulfil their eligibility criteria. your lender will
approve the loan. Your loan will get sanctioned, subject to general terms and conditions and will

get credited to your account within a few days. It’s a good idea to ​check your eligibility by using
home loan eligibility calculator​ before applying for one.

Loan Sanction

After getting a sanction, if you think that you’ll get the exact amount you’re eligible for, then
you’re mistaken. The final loan depends and varies from one lender to the other and they decide
on the amount after verifying each of your documents thoroughly.

It’s best to make a rough estimate for the home construction cost and file the loan application
with the bank or NBFC with your required amount, stating your estimated loan budget.

Disbursement

The disbursement process is also quite different as the loan is disbursed in parts—the entire
sanctioned amount is not sent to your account at once. The money is released based on the
progress of your construction work.

However, the lender will not pay you a single penny, unless you don’t bring in your own
contribution (margin money) and fulfil the eligibility criteria.

You’ll need to submit photos of your house along with certificates from your architect or civil
engineer about the different stages of completion of your house.

Your lender might rely on the photos or certificates submitted by you or send their own in-house
technical expert to verify the ongoing of your construction project. This means that if the
construction is completed faster, your loan amount will get disbursed faster.

Most of the leading lenders in the country offer housing construction loans. However, not all
lenders offer construction loans and are not comfortable with financing self-constructed
properties.

Research online and look for banks and NBFCs offering Home Construction Loans and make sure
to give your prospective lender a proper estimated breakdown of the total construction cost that
includes foundation, electrical, plumbing, framing, and painting cost. Take into account the
builder’s profit too.