Constructing your dream house can soon turn out to be overwhelming if money doesn’t keep pace with your rate of construction. Paying all expenses at one go or carrying a large loan in the beginning further heaps the pressure. A home loan for an under-construction property fixes this issue by disbursing money in installments according to your construction phase.
This way, you only pay for what you require at every step, like materials, labour, and other expenses, without the burden of a lump sum loan. It keeps your cash flow constant and your project on schedule. Before you begin construction, getting to know how this loan operates can make a difference in bringing your dream house to life. You can check our Home Loan EMI Calculator to know your eligibility here.
Overview Of Home Loan For Under-Construction Property
A home loan for under-construction property is specifically tailored for properties that are still in the building phase. Unlike standard home loans for ready-to-move-in homes, the key difference lies in how the loan funds are released.
Instead of receiving the entire sum at once, borrowers obtain money in installments that align with the stages of construction. This phased disbursement directly impacts the EMI computation and payment timeline. It is important to understand the process for anyone who intends to apply for such a loan. So they can plan their finances properly and manage the repayments accordingly until the property is constructed.
Advantages and Key Highlights of Home Loans for Under-Construction Property
Affordable EMIs
Disbursal is done in phases according to the progress of construction. Interest is charged only on the amount released; hence, there will be smaller EMIs in the initial construction. This makes it easier to plan your expenses and your finances at the beginning of your house construction project.
Convenient Interest Payments
Interest payments apply solely until possession, known as pre-possessory interest (PPI). Post-possession, EMIs cover both interest and principal. This arrangement facilitates simpler financial management during construction without the burden of repayment upfront until the house is complete.
Flexible Repayment Terms
The repayment term can go up to 30 years, leaving enough time to repay at ease. Lenders take into consideration your age while determining tenure to ensure terms are suitable for your financial conditions and monthly instalments are affordable during the term of the loan.
Active Interest Rates
Construction loans on properties usually carry lower interest rates than property loans that are ready for occupancy immediately. Being responsible in terms of finances is one way to ensure even lower rates, and this can be a cost-saving measure in the long run and help your home loan become easier to afford.
Step-by-Step Home Loan Disbursement Process
Step 1: Sanctioning and Agreement
Once you submitted your loan application, processing fees and relevant documents. Your lender checks your financial credentials, such as your credit rating and income. Once approved, you receive a sanction letter verifying your eligibility. Executing the loan contract sets the terms and obligations for your borrowing.
Step 2: Disbursement with Construction Phases
The disbursement of the loan amount is done in instalments against the construction milestones, not all at once.
Step 3: Disbursement Request
As the construction goes on, you can ask for money. You request a disbursement to your lender to release the next payment.
Step 4: Inspection and Verification
The lender sends professionals to the construction sites to verify that the progress is in line with the funding request. This is done to ensure proper fund utilisation.
Step 5: Disbursement in Accordance With Construction Progress
When authenticated, the payment is released by the lender either to your loan account or the builder, as per the agreement.
Step 6: Repayment Commences
Either pre-EMIs (interest alone) or regular EMIs (principal along with interest) start being repaid from the first disbursement date, as per your agreement.
Step 7: Last Disbursement and Loan Closure
The final disbursement is made once construction is complete and possession is handed over. If only pre-EMIs were being paid earlier, the repayment will now shift to full EMIs, initiating the standard loan repayment schedule.
Eligibility Criteria For Home Loan On Under-Construction Property
Age
Candidates should be between 18 and 70 years old. The salary may vary depending on the type of job, whether salaried or self-employed. Know the process to obtain Home Loan for Self Employed professionals here.
Experience and Salary
A minimum of 3 years of work experience is required. The expected monthly salary will be Rs. 25,000 to Rs. 40,000. Additionally, existing EMI obligations should not exceed 65% of your average monthly income to make it affordable.
The Credit Score
A CIBIL score of 750 or more is needed for smooth and quick home loan pre-approvals in India, indicating satisfactory creditworthiness.
The Other Factors
There could be other conditions with the lender, e.g., Loan-to-Value (LTV) rates, a co-applicant clause, or specific conditions. Being aware of these beforehand will prepare you to apply and enhance the sanction probability.
Documents Required For a Home Loan On an Under-Construction Property
Proof of Income
Documents such as pay slips, bank records, or tax filings to verify your earnings.
KYC Documents
- Authentic identification documents, residence verification, and recent passport-sized photos.
- Khata Extract and Khata Certificate
- Papers showing property ownership and registration status.
Builder Agreement
- A properly stamped and registered agreement between you and the builder.
- NOC from Builder, a No Objection Certificate is on the builder’s official letterhead.
A Sale Deed
Legal proof of transfer of ownership of the property.
Project Progress Letter
A letter from the builder or architect explaining the progress of the construction.
If the registration of the project is not finalised, you can provide supporting documents:
- A copy of the agreement was actually signed with the builder.
- An authority letter signed by the architect or builder
- Proof of your financial input for the property purchase.
Note: Lenders can ask for additional documents according to their policies. Seek advice from a financial expert to optimise tax benefits and manage repayment schedules efficiently.
Key Things to Consider Before Applying
- Research local property values and review builders’ terms carefully.
- Verify the builder’s Commencement Certificate for loan approval.
- Negotiate the price of the property to minimise the loan and EMIs.
- Track the progress of construction by frequent communication with the builder and the lender.
- Report delays promptly to prevent unwarranted disbursements.
- Make use of tax savings under Sections 80C and 24B of the Income Tax Act.
- Take the advice of a financial counsellor to maximise tax savings and manage repayment schedules effectively.
Final Words
A construction loan for an ongoing building property offers flexible financing in line with your construction schedule, lightening your financial burden. Pre-application details on eligibility, documents required to be furnished, and key points simplify the process.
Keeping track of construction progress and legal approvals prevents any loss to your investment. Making use of tax benefits enhances affordability further. Thoughtful planning and mindful decision-making can make your dream home a reality with less stress and enhanced financial control.
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