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Home construction loans serve as a cornerstone in the architecture of modern real estate development, providing the necessary capital for individuals to translate blueprints into bricks and mortar.

These specialised loans cater specifically to the unique financial requirements of constructing a home, distinguishing them from standard home loans in several key aspects, including disbursement schedules and loan approval criteria.

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What is a Home Construction Loan?

A home construction loan funds the building process of a house before it becomes a habitable structure. Unlike traditional home loans that finance the purchase of existing properties, construction loans cover the myriad costs associated with building a home from the ground up. These typically include labour, materials, and often the land purchase itself, contingent on the borrower’s needs and qualifications.

The nature of these loans is inherently detailed and dynamic. Typically, funds are released in a series of draws correlating with the completion of different construction phases. Consequently, this structured disbursement ensures that funds are used appropriately, thereby reducing the risk to the lender and aligning the progress of construction with the financial outlay.

Types of Home Construction Loans

Home construction loans can be categorised into two primary types:

1. Self-Construction Loan:
This loan is suitable for individuals who already own a plot and are looking to finance the construction of their house on that plot. It provides the funds necessary to cover the costs associated with building a home.

2. Plot + Construction Loan (P+C Loan):
For those who need to purchase a plot and also fund the construction of a house on that newly acquired land, the Plot + Construction Loan is ideal. This dual-purpose loan simplifies the financing process by covering both major expenses under one product.

Current Home Construction Loan Interest Rates 2024

Bank/ HFCs	Interest Rate	Maximum Loan Amount	Maximum Loan Amount
HDFC Bank	8.75% p.a. onwards	Up to Rs. 10 Crore	30 years
ICICI Bank	9.00% p.a. onwards	Up to Rs. 5 Crore	30 years
SBI	9.50% p.a. onwards	Up to Rs. 5 Crore	30 years
Bajaj HFL	8.50% p.a. onwards	Up to Rs. 15 Crore	40 years
LIC HFL	9.10% p.a. onwards	Up to Rs. 15 Crore	30 years
Punjab National Bank	8.50% p.a. onwards	Up to Rs. 5 Crore	30 years
Tata Capital HFL	8.75% p.a. onwards	Up to Rs. 5 Crore	30 years
Piramal Capital	9.50% p.a. onwards	As per applicant’s repayment capacity	30 years
Aadhaar HFL	9.00% p.a.onwards	Up to Rs. 1 Crore	30 years

Understanding Interest Rate Variability on Home Construction Loans

Home construction loans in India typically feature floating interest rates, meaning the rates can vary over the loan period depending on the prevailing market conditions. These rates are often aligned with the lender’s benchmark rates such as the Marginal Cost of Funds based Lending Rate (MCLR) or the Repo Linked Lending Rate (RLLR). 

The specific interest rate applied to a construction loan will depend on several factors including the borrower’s credit score, monthly income, occupation profile, and the amount of the loan.

Floating rates are used because they allow the lender to adjust the interest cost based on changes in the broader economic environment, which can be particularly relevant over the long periods typically associated with construction loans. This setup helps manage the risk for lenders in case of rate fluctuations over time.

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Eligibility Criteria for a Home Construction Loan

To be eligible for a home construction loan in India, applicants must meet several criteria that generally include age, income, credit score, and other financial and property-related requirements:

Factor	Criteria
Age	21 – 65 years
Income Criteria	Stable income is required
Employment Profiles	SalariedSelf employed non professionalsSelf employed professionals
Credit Score	750+
Nationality	Indian residentsNRIs

Documents Required for Home Construction Loans

To streamline the process of applying for a home construction loan, first and foremost, having all the necessary documents prepared is crucial. Furthermore, below is a structured format of the common documents required, along with specific documents needed by salaried, self-employed individuals, and NRIs.

Documents	Description
Common Documents	– Life insurance policy – PAN Card – Passport – Birth certificate – School leaving certificate – Bank statements – Property tax receipt – Utility bill – Property registration documents – Voter ID – Passport – Aadhaar Card – Driving License – Passport-size photographs – Duly filled loan application form – Existing loan details (loan account statements)
Documents for Salaried Individuals	Income Proof: Photocopy of the salary account bank statements for the last six months. Salary Slips: Copies of the appointment letter, certified true copy form 16, salary slips for the last three months, and yearly increment letter. Processing Fee Cheque: Issued from the salary account
Documents for Self-Employed Individuals	Income Proof: Bank statements for the last six months of OD/CC facilities, operative current account statement for the last six months. Business Documents: Business commencement registration certificate Business profile on letterhead Last three years’ Profit & Loss Projection statement Last two years’ income tax returns. Processing Fee Cheque: Issued from your business account.
Documents for Non-Resident Indians (NRIs)	Income Proof: Overseas salary account details or Indian NRO/NRE account statements for the last six months. Credit Report: Credit report from the existing country of residence. Processing Fee Cheque: Issued from a business or salary account depending on the status of the applicant.

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How to Apply for a House Construction Loan with Credit Dharma?

1. Assessment of Needs:

Determine the amount you need based on the construction cost, which includes land acquisition if not already owned.

2. Check Eligibility:

Typical eligibility criteria include age (usually between 18-65 years), income stability, a good credit score (preferably above 750), and resident status (Indian or NRI).

3. Select a Lender:

Research various lenders like SBI, HDFC, ICICI, and Axis Bank who offer construction loans with different terms and interest rates.

4. Gather Necessary Documents:

• For All Applicants: Identity proofs (Aadhaar, PAN, passport), address proofs (utility bills, voter ID), and financial statements.
• For Salaried Individuals: Recent salary slips, employment verification, and income tax returns.
• For Self-Employed: Business details, income tax returns, and financial statements for the business.
  

5. Loan Application:

Fill out the application form provided by the lender, which includes personal details, financial information, and details about the construction project.

6. Property Verification:

Submit the required documents for the property, including title deeds, approved building plans, and an estimate of construction costs from a certified engineer or architect.

7. Loan Approval Process:

The lender will assess the loan application, conduct a credit appraisal, and may inspect the construction site before approving the loan.

8. Loan Disbursement:

Loans are typically disbursed in stages based on the progress of the construction, and you may need to submit periodic updates through photos or reports from an architect or civil engineer.

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How is Home Construction Loan Disbursed?

Typically, the disbursement of a home construction loan is executed in phases that align with specific milestones in the construction process. Consequently, this structured approach ensures that the loan amount is used for its intended purpose, directly correlating with the progress of the building. Below is a breakdown of these phases:

Phases	Disbursement Trigger	Verification	Purpose
Foundation Laying Phase	Beginning of construction	Inspection of foundation laying completion	Ensures that the project has started and foundational work is completed
Plinth Level Phase	Construction reaches plinth level	Physical inspection or provision of photographs/certificates	Confirms that the base structure to support the walls and floors is ready
Lintel Level Phase	Completion of lintel level, which supports doors and windows	Architect’s certificate or site visit by lender’s representative	Ensures that the basic skeleton of the house is structurally complete
Roof Casting Phase	Completion of the roofing stage	Submission of progress report from engineer or architect	Indicates that the building is weatherproof and major structural work is complete
Finishing Stage	Plastering, flooring, painting, and fittings installation	Regular updates through site inspections	Funds are used for interior works and finishing touches, preparing the house for occupancy
Completion and Handover	Entire construction completed and property is ready for handover	Final inspection and approval from the building authority	Final instalment to wrap up any last-minute detailing and officially complete the project

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Construction Loan Repayment Options

Home construction loans in India offer flexible repayment options to accommodate the unique requirements of building a home. To provide further clarity, here’s an overview of the common repayment strategies:

• Standard EMI Plan:
  • Description: Regular fixed monthly payments covering both interest and principal.
  • Best For: Borrowers with steady, predictable income looking for consistency in repayments.
    
• Step-Up Repayment:
  • Description: EMIs that start lower and increase over time.
  • Best For: Young professionals expecting a rise in salary over the years.
    
• Flexible Loan Instalment Plan (FLIP):
  • Description: Initially higher EMIs that decrease over time.
  • Best For: Borrowers who expect a decrease in income in the future, such as nearing retirement.
    
• Tranche Based EMI:
  • Description: Pay EMIs on the disbursed amount or opt to pay only the interest until full loan disbursement.
  • Best For: Managing cash flow during the construction phase when full loan amounts are not yet disbursed.
    
• Pre-EMI:
  • Description: Payment of only the interest on the disbursed loan amount until full disbursement.
  • Best For: Minimising initial outgo during the construction period.
    
• Balloon Payment:
  • Description: Periodic lump sum payments in addition to EMIs.
  • Best For: Those with fluctuating income who receive bonuses and can afford larger payments sporadically.
    

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When Do EMI Payments Begin for Your Construction Loan?

When it comes to home construction loans, the commencement of Equated Monthly Instalments (EMIs) is typically dictated by the loan’s disbursement stages and the specific lender’s policies. Here’s a structured overview of when you might expect to start paying your EMIs:

During Construction Phase

There are generally two payment options during the construction phase:

1. Interest-Only Payments

• Description: Payments cover only the interest on the disbursed loan amount.
• Advantage: Keeps initial payments low while construction is ongoing.
  

2. Pre-EMI Payments

• Description: Regular payments of interest on the amount disbursed so far.
• Common Use: Frequently utilised in India to manage financial load before full loan utilisation.
  

After Construction Completion

EMI payments typically begin in full after certain key milestones:

1. Completion of Construction

• Timeline: Usually 18-24 months post the initial disbursement.
• Trigger: Agreed upon at the inception of the loan.
  

2. Full Disbursement of Loan

• Condition: Occurs if the entire sanctioned amount is used before the end of the construction period.
  

3. Receipt of Completion Certificate

• Requirement: Some lenders may ask for an official document confirming the construction’s completion.
  

Key Considerations

• Moratorium Period:
  Offers a grace period (6-12 months) post-construction where EMIs might be deferred.
  
• Flexible Repayment Options:
  • Immediate Start: Allows for early commencement of full EMIs to reduce total interest.
  • Step-up EMIs: Starts with lower EMIs, increasing over time to match expected income growth.
    
• Disbursement Schedule Influence:
  EMIs are recalculated as more of the loan amount is disbursed, potentially increasing interest or pre-EMI amounts.
  
• Conversion to Term Loan:
  Post-construction, the loan generally transitions into a typical home loan with full EMIs starting based on the total disbursed amount.
  

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Difference Between Regular Home Loan and Construction Loan

Aspect	Regular Home Loan	Construction Loan
Purpose	To purchase a pre-existing residential property.	To finance the construction of a new home on owned land.
Disbursement of Loan	Disbursed as a single lump sum once the property is finalised.	Disbursed in instalments based on construction milestones.
Interest Rate	Generally lower compared to construction loans.	May be higher due to the progressive disbursement nature.
Repayment Commencement	Begins immediately after the loan disbursement.	Often includes options like Pre-EMI; full EMI starts post-construction.
Collateral	The property being financed serves as collateral.	The land and eventually the building under construction serve as collateral.
Flexibility in Use	Funds must be used to purchase listed property.	Funds can be used flexibly across different stages of construction.
Risk Assessment	Based on property value and borrower’s financial standing.	More complex, considering the construction risks and project feasibility.

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Tax Benefits on Home Construction Loan

1. Section 24

• Interest Deduction: Deduct up to Rs. 2 lakhs on interest paid on your construction loan for a self-occupied house, provided construction is completed within five years from taking the loan. For rented out properties, there is no upper limit on the interest deduction.
  

2. Section 80C

• Principal Deduction: After construction completion, you can claim up to Rs. 1.5 lakhs on the principal repayment. Note, if the property is sold within five years of possession, claimed deductions will be reversed.
  

3. Section 80 EE

• First-Time Homebuyers: Claim an additional Rs. 50,000 deduction on interest annually, under certain conditions like the loan amount being under Rs. 35 lakhs and the property value under Rs. 50 lakhs. This is applicable if the loan was sanctioned between April 1, 2016, and March 31, 2017.
  

4. Section 80 EEA

• Affordable Housing: If ineligible for Section 80EE and the property is purchased between April 1, 2019, and March 31, 2020, claim up to Rs. 1.5 lakhs on interest for loans taken for affordable housing.
  

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Conclusion

Building your own home with a construction loan not only allows for personalized design but also enables effective cost management, ultimately making it a financially and personally rewarding endeavor.

Moreover, the availability of construction loans at attractive rates and significant tax benefits under various sections of the Income Tax Act make it an even more appealing option.

Are you ready to simplify your home construction loan process?

Simplify Your Home Loan Process with Credit Dharma: When embarking on your home construction journey, you’ll find it’s made simpler and hassle-free with Credit Dharma. By partnering with us, we provide clear guidance and streamlined loan application processes, ensuring you can focus on what really matters—building your dream home.

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Frequently Asked Questions