There are various housing requirements. It is no different with housing loans. Many types of home loans exist, each designed to meet specific needs. Unlike conventional home loans, a construction loan is available for properties that are built from scratch.
Depending on their purpose, these constructions may serve residential or commercial needs. Let’s say you bought some land in an amazing deal. By taking out a construction loan, everything needed to complete a construction project can be financed.
It is possible to apply for a home construction loan with a bank either under the traditional ‘home loans’ category or its own category. There are also only a few lenders that specialize in lending for construction-based homes.
In this article, we will examine house construction loans in depth, including the interest rates, eligibility requirements, and documentation.
About Home Construction Loan
A Home Construction Loan is used to raise capital for land purchases and building properties on the same site. If you own land already, the loan can also be used to build a house. Building or renovating a home is a complex financial undertaking that requires the assistance of a trustworthy financial advisor.
Types of Home Construction Loans
It is possible to get a house construction loan from different lenders. These types of loans are available to borrowers based on their specific needs:
- Self-Construction Loan
Individuals who already own property but need funds only for construction can apply for self-construction loans. Loans of this type are provided in phases in line with the progress of construction
As the work progresses, lenders typically make disbursements in phases, requiring a detailed construction plan, a budget, and a timeline. Only the disbursed amount incurs interest, not the entire sanctioned amount.
- Composite Loan
These loans are available to borrowers who need help with land acquisition and property development. They combine the best characteristics of plot loans and construction loans. With the loan amount available for both plot purchase and house construction, you can make the most of it. Following the acquisition of the land, borrowers generally must begin construction within a specified timeframe, typically 2–3 years. It is ideal for those who wish to customise and fund their dream house from scratch.
- Home Renovation/Improvement Loans
Renovation loans enhance the beauty of homes, while improvement loans make them more practical. They are ideal for modifying a home’s structure, updating outdated interiors, or improving the functional efficiency of the house. Whether you are repainting walls, replacing flooring, or renovating your kitchen and bathroom, a Home Renovation/Improvement Loan is ideal. In most cases, small loans result in faster application processes and fewer documents are required compared to home loans.
For existing homeowners looking to expand their financing options, a top-up loan on your existing home loan might be another viable option for funding renovations or additional construction work.
Features of Home Construction Loans
Home construction loans offer borrowers several benefits. This loan stands out from the rest of the competition because of its following features:
- Loan Tenure:
A construction loan in India typically has a tenure ranging from 10 to 30 years, similar to a home loan. Although there are many similarities between these two types of loan, most lenders offer interest-only payments during the construction period (also called pre-EMIS). Upon completion of construction, the borrower begins paying the full EMI, which includes both principal and interest. To better understand your monthly payment obligations, use our home loan EMI calculator to plan your finances effectively.
- Refinancing Facility:
Borrowers can refinance these loans at the end of the tenure or convert them into standard home loans.
- Interest-Only Repayments:
As long as the construction is in progress, the borrower may repay only the interest portion of the loan. This reduces repayment burdens and simplifies loan settlements.
- Up to 90% Loan-to-Value Ratio (LTV Ratio):
RBI home loan guidelines now allow banks in India to finance up to 90% of your home construction cost.
- Secured Loan:
Under-construction properties themselves serve as collateral for secured loans. The lender can use this land as collateral for repayment in the event of non-repayment of the loan.
- Loan Disbursement:
Construction loans are not disbursed as a lump sum. Instead, they are released in phases or tranches based on the project’s construction progress. Each disbursement is made after the lender inspects and approves the completion of a certain stage (e.g., foundation, slab, roofing, etc.).
Home Construction Loan Interest Rates
The interest rates on home construction loans are typically higher than those on bank-administered home loans. Generally, rates will range between 6.5% and 12%, depending on the lender, the amount, the credit score, and the repayment capacity.
The interest rate of a construction loan can also fluctuate, depending on whether it is a fixed-rate or floating-rate loan. If the interest rate is fixed, it remains unchanged, whereas if it is floating, it fluctuates in response to market changes. For detailed information about current market rates and how they compare across different lenders, check out our comprehensive guide on home construction loan interest rates.
Eligibility Criteria for Home Construction Loan
There are some similarities between the eligibility criteria for regular home loans. Below is a summary of some key points regarding eligibility for home construction loans:
Lenders typically provide housing construction loans to Indians living in the country and to Non-Resident Indians (NRIs).
- Age: Banks and HFCs generally approve homebuilding loans for borrowers over 18. Banks and housing finance companies usually demand the borrower repay home construction loans by age 70.
- It is possible to obtain a home building loan whether self-employed or employed.
- A home construction loan borrower can benefit from adding earning family members as co-borrowers or opting for a longer-term loan to increase their eligibility.
- Credit Score: Personal loans for housing construction are more likely to be approved when applicants have credit scores of 700 or higher. High-credit-score applicants, however, may be able to obtain home loans with lower interest rates.
- The lender may also assess an applicant’s income, work experience (for salaried applicants), and business continuity (for business owners), as well as their employer’s and occupation profiles, when determining eligibility.
How to Apply for Home Construction?
The application process for construction financing differs from lender to lender, but it is generally straightforward. Here’s how it works:
- Ensure Your Eligibility:
First, ensure that you meet all of the lender’s eligibility requirements. Lenders may request information about the borrower’s age, income, and credit score. These details will help the lender analyse your repayment capabilities. Before diving into the formal application process, consider getting home loan pre-approval in India to understand your borrowing capacity and strengthen your position with lenders.
- Choosing a Lender:
Before choosing a lender, compare the options for financing, interest rates, and repayment terms. It’s great to request the past service reviews that will help you analyse their reputation in serving the construction loan requirements.
- Application and Documents:
Gather and submit your documentation with the loan application. Key documents may include a project plan, builder agreement, bank statements, and so on, depending on what is requested. Ensure that all the documents are up to date and properly signed to avoid any further charges.
- Process and Approval:
This will be determined after the lender has reviewed your documents and the project plan. However, lenders may also run a background check on the builders and contractors involved in the construction process. Approval may take some time, depending on the individual application.
- Disbursement:
Loans are disbursed in stages based on the completion of each construction phase. Every loan instalment will be released after thoroughly inspecting and verifying the complete construction stage. Therefore, it is essential for you to coordinate with your builder and provide them with a deadline for every construction stage to ensure timely fund release from the lender.
Documents Required for Home Construction Loan
There is little difference between the documentation process for a home loan and what is required for a regular mortgage. Here are the basic requirements for applying for a construction loan:
- Identity proof
- Address proof
- Age proof
- Income proof
- Proof of employment/business
- Property-related documents
- Estimated cost quotation for home construction
- Duly filled application form
Note: Lenders for home construction loans may require additional documentation.
Home Loan Vs Construction Loan: Key Differences
| Basis | Construction Home Loan | Standard Home Loan |
| Purpose | Building a new property from scratch | The purchase of a property that has already been constructed or is in the process of being constructed |
| Loan Disbursement | Throughout the construction process, payments are disbursed in instalments | Immediately sanctioned the full amount |
| Interest Rates | A slightly higher interest rate is caused by a higher risk and a lower demand | The high level of competition in the market results in a relatively lower interest rate |
| Loan Tenure | The loan tenure of a construction loan is longer and can go to 30 years | The loan tenure of a standard home loan can be short or longer, depending on the borrower’s paying capability. It can range from 5 years to 30 years |
| Repayment | While construction is underway, only interest repayments are made. Upon completion of the construction, principal repayments can begin. | The loan amount is disbursed immediately after repayment begins. |
For those specifically looking at construction financing options, our detailed article on home loans for house construction in India provides additional insights and considerations for your construction project financing needs.
A construction loan is one of the most important forms of financing for aspiring homeowners. A land acquisition loan can cover many expenses, including finishing touches, making it invaluable. Borrowers provide plans, budgets, and timelines during the application process.
FAQs
Is it possible to get a home construction loan for a commercial property?
Lenders will only issue home construction loans to residential properties built on residential lots. Construction loans on commercial or non-residential property may or may not be possible based on local and state land use regulations.
Do I need a construction plan to get a construction loan for my house?
Yes. Homebuilding loans can be offered as standalone home loan or as a separate homebuilding loan, and some lenders require borrowers to submit detailed homebuilding plans.
How much does it cost to process a home construction loan?
The home construction loan processing fee typically ranges from 0.5 to 2% of the loan amount. However, some lenders may charge higher fees for construction loans.
Hemali Patel