Home construction loans – Interest Rate, Eligibility Criteria, Documents

What is a Home Construction Loan?

A home construction loan, also known as a house construction loan, is a loan taken to enable you to build your own property from scratch. It is different from a home loan because it seeks funds to finance the construction of a property rather than the purchase of an existing and fully constructed property. You should do your research and make sure you have all the information before deciding on which loan to apply for, as some banks have schemes that can benefit certain groups of people. For example, several banks offer special interest rates if the loan applicant or at least one of the co-applicants is a woman.

Home construction loans do have certain advantages, including low-interest rates, large loan amounts, long tenures, flexible repayment options, quick disbursal, tax benefits, and a clear and transparent application process. However, this process also requires more documentation than a home loan to buy an already-built property, because you will need the necessary approval from the municipal corporation and other relevant authorities.

You can generally avail of a loan amount equivalent to at least 75% of the market value of the property if you are granted a home construction loan. However, the actual amount and other terms will depend on the assessment of your individual application. If you keep up timely repayments of your loan EMI, you can also apply and get approved for a home loan top-up.

It is important to remember that since you are building a property from scratch, you will likely need to endure more paperwork and get the required permits from the relevant authorities such as the municipal corporation. You will probably need to avail a lawyer’s services as well to ensure you are following the legal regulations.

Features of Home Construction Loan

• Quick and large sanctions
• Flexible repayment options with longer tenure periods
• Low interest rates, below 10%

Interest Rates

Interest rates on a home construction loan tend to be fairly low and are generally below 10%. Nowadays most banks have websites where you can find an interest rate calculator. If you input your credit score and details about your occupation, you can instantly get a rough idea of the interest rate you would have to pay on a home construction loan, if you are granted one by that particular bank.

Large Sanctions and Long Tenure Period

If you qualify for a home construction loan, you can be approved for an amount equivalent to up to 80% of the market value of the property in some cases. Additionally, you can get a long tenure period of up to 15 years. These advantages make a home construction loan a feasible option if you are keen on building a property from scratch for residential or investment purposes.

Eligibility Criteria

You will have to be either an Indian citizen or an NRI (non-resident Indian) to apply for a home construction loan. Your age will have to be between 21 and 65 years old. You will have to be salaried or self-employed with the relevant documents that can indicate proof of income.

To apply for a home construction loan, you will also have to provide proof of residence within India, either for a permanent residence or for a rented residence where you have stayed for at least one year. Lastly, when granting a home construction loan, banks will look for a strong credit score, usually a CIBIL score of above 700 at least.

Documents

In general, to apply for a home construction loans you will require proof of identity, proof of residence, proof of income, property-related documents, and any miscellaneous documents depending on your circumstances. The financial documents you need to provide will depend on whether you are salaried at a registered company or self-employed.

While a salaried employee only needs to show salary slips for 6 months and furnish their Income Tax Returns for the last year, you will need to provide some more documentation if you are self-employed, especially if you own a business. Not only will you have to provide bank account statements for your business account for the last 6 months but also your individual savings account bank statements. Additionally, you will have to provide Income Tax Returns and balance sheets of the business entity for the previous three years, and these documents must be approved by a certified CA.

Finally, since you are building a property from the ground up, you will need to provide a blueprint for the prospective property which has been approved by an architect. Additionally, you will have to approach the municipal corporation and get them to sign off on your plans as well. Only upon furnishing all the documents required to prove that you have the necessary authorization will your home construction loan be sanctioned.