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January 2022

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What Are The Eligibility Factors For Home Construction Loan

Home loans are primarily to purchase a house; however, not all people prefer the same reason. Some want to construct their dream house. It’s an excellent endeavour; however, the efforts and finances involved in building your dream house are significant, but in the end, it all makes sense.

If you are worried about finances, then you are at the right place. Here’s a guide on how you can manage your finances with a home construction loan.

What is a Home Construction Loan?

A home construction loan is typically structured to meet the needs of the borrowers looking to construct a house instead of buying a ready-made one. The main difference between a home loan and a home construction loan is the disbursal amount. While the home loan disburses the entire amount together, a home construction loan makes stage-wise disbursement of the loan amount. The disbursal is in installments accounting for the construction work progress.

This relieves the borrowers from managing a considerable sum of money as the loan amount is disbursed when requested per construction work needs. The interest is charged only on the disbursed amount and not on the entire sanctioned amount. As and when you use the funds, interest starts accruing.

Home Construction Loan Eligibility

Like home loans, home construction loans also involve specific eligibility criteria. Each financial institution has its set of eligibility criteria. These normally include:

  • Age: The applicant’s age should be between 24-65 years to avail of the home construction loan.
  • Experience: Home construction loans can be availed of by salaried and self-employed individuals. Salaried applicants must have a minimum work experience of 2 years, while self-employed applicants need a minimum of 3 years of work experience.
  • CIBIL Score: The CIBIL score is your credit history represented in 3 digits within a range of 300 to 900. CIBIL score depicts the creditworthiness and past credit performance of the applicant. A good CIBIL score, especially above 750, is paramount for the approval and sanction of the home construction loan.

Home Construction Loan Features

Following are some features that home construction loans encompass:

  • Shorter tenures: Home construction loan tenures are shorter compared to home loans. This is the prime reason that home construction loans often involve a higher amount of EMI than home loans. Therefore, it is always wise to use a home loan EMI calculator to calculate the EMI amount you will need to pay.
  • Documentation: While the essential documents are necessary, certain additional documents are required in case of a home construction loan. The following documentation is required for the same:
    • PAN Card.
    • Aadhaar Card.
    • Income Proof.
    • Residence Proof.
    • Bank Statement.
    • Plot Ownership Proof.
    • Legal authorization of plot from the local authority.
    • No Encumbrance Certificate of property.
    • Detailed Construction Plan.
    • Estimated Cost of Construction authorized by an architect, civil engineer, etc.
  • Pre-EMI payment clause: Some lenders may include a pre-EMI payment clause in your loan agreement requiring you to start paying pre-EMI payments before the actual amount gets disbursed. This pre-EMI payment consists of the interest component of your loan.

In a Nutshell

Home construction loans are one of the most effective ways to bring your dream true. While it is not the only option for constructing your house, it is the most beneficial, considering home loan interest rates that meet a borrower’s needs when building their dream house.

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