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Understanding the Basics of House Construction Loan in India

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In India, the construction industry accounts for nearly 8% of its GDP. Out of the various segments of this industry, residential construction accounts for almost 75% of total activity. Thus, residential construction is one of the sectors which receive maximum investment.

In recent years, more individuals are looking to avail home construction loan from financial institutions. This advance, as opposed to home loans, can be utilized to construct a house from scratch on a plot of land you own.

If you are looking to avail it, you should know everything about the home construction loans.

What Does a Loan for Home Construction Entail?

A house construction loan is a short-term advance that individuals can avail to finance home building or for the modification of their house.

A key feature of this advance is that the entire credit amount is not disbursed at once. You can avail funds from your lender depending on your requirements and stage of construction of your building. Also, construction loan interest rate is levied only on the amount you utilize instead of the total amount you borrow.

Important Things to Know About This Advance

Even though this advance is a part of the home loan portfolio of products, the approval and disbursement process of this loan varies from other home loan products. Thus, before applying to avail this loan, there are a few crucial things you should know about it.

  • Disbursement of Credit Amount 

With home loans, credits are disbursed after you make the initial down payment. Lenders disburse the entire amount at one go after you make the pre-decided down payment. However, with a home construction loan, the loan amount is disbursed in installment. The size of installments depends on factors like loan size, construction progress, loan to value ratio, etc.

  • Loan Disbursement Is Affected by the Progress of Construction 

Lenders often set pre-decided loan amount disbursals based on levels of construction. The typical construction levels are a foundation, concrete work, lintel,  and final level. If each of these construction levels is not completed within the designated time, the lender has the authority to halt payment. Thus, the construction speed has a direct impact on the amount of loan disbursed.

  • You Cannot Alter Construction Plans After Availing the Loan 

You have to submit full details of your construction plan before you avail a home construction loan. For instance, you cannot avail a loan to construct a two-storied building and then build only one story. You need to inform the lender of its progress throughout the construction process. They can even freeze payments if there is a deviation from the original plan.

  • You Have to Pay Pre-EMI Interest 

Borrowers have to pay an amount as pre-EMI after availing the loan. This pre-EMI is the interest on the loan amount disbursed and does not include the actual EMI amount. The actual loan tenor starts only after the construction of the property is completed. You can make use of an EMI calculator to know the amount you will have to pay each month, before availing the advance.

These are some of the fundamental aspects of this type of loan. Also, this loan requires information like your CIBIL score, your down payment, your monthly income,  and plot value to determine your eligibility. Calculate the amount you are entitled to using a home loan eligibility calculator.

Additional Read: How To Save On Your Construction Loan

To avail a home construction loan to build your dream house, you must keep your property papers and construction plans ready. These are the two most important documents that lenders require to approve your loan. Make sure you check what other documents are required to avail this loan to avoid any hassle in the loan application process.

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