A Detailed Guide on House Construction Loans
House Construction loans are quite different from home loans in several ways. The rules associated with home construction loans before and after the loan approval as well as the associated tax benefits are quite complicated and can offer a good amount of surprise for the loan applicant.
The following guide will offer you certain insights about home construction loan requirements as well as the process and associated tax benefit.
Home Construction Loan Requirements
The basic eligibility criteria as well as the documents required for availing a home construction loan are similar to that of any other home loan. An applicant has to provide his/her income proof, employment as well as identity proof, which in turn, would allow the financial lender to determine the loan repayment capacity of the borrower.
In the case of home construction loans, the financial lenders have greater control over the credit application. They go through the project estimates as well as the property documents of the borrower quite carefully. Financial lenders such as banks are very strict about the documentation and underwriting process when it comes to approving credit for home construction loans.
Following are the two vital factors which financial lenders pay close attention to before approving a home construction loan –
- Documents related to property: As the purchased property serves as security and is mortgaged to the bank till the repayment of the loan, financial lenders will go through the documents related to the property quite carefully. Documents such as Sale Deed, No Objection Certificate from the respective municipal authorities, the legal status of the plot as well as the approved plan has to be submitted by the borrower for availing a home construction loan.
- Construction plans: If an applicant submits a tentative construction plan that is subjected to change in the future, it is highly likely that the home construction loan application is going to get rejected from the financial lender. Banks usually ask for a detailed construction plan for approving the loan application. The construction plan must clearly specify all the details such as boundaries, projected profits in case of rent or presale, floor plan, estimated time period, the purpose of the property, total cost, property value, inventory, and so on.
5 Important Things to Remember About Home Construction Loans
- Loan Amount Disbursal tied to Construction
When compared to a home loan, a home construction loan amount is not completely disbursed at once. The loan amount is usually disbursed in terms of instalments, which in turn, depend on the different stages of construction. The financial lender will usually prefer to obtain photos of the various stages of construction as proof of progress. The lender can also get them verified by an architect.
This steady progress with home construction is very important as it is directly related to the disbursement of the loan amount. The financial lenders will decide upon the time frame required for each stage of construction, and any delays associated with it will directly impact their decision of releasing the next loan instalment.
It is quite important to remember that once the construction plan is finalized and the financial lender has approved the loan amount, no further changes can be done in the design or layout of the home. For instance, if you have applied for a home construction loan for constructing a 2-storey house, it cannot be altered to a single storey one.
Also, the applicant must remember that the interior costs such as furnishing, plumbing, lighting and electrical work are not associated with construction and hence are not included in the loan amount.
- Applicant has to pay Pre-EMI Interest
The applicant of a home construction loan is expected to pay a pre-EMI interest limited to the received loan amount while managing the home construction loan. The interest has to be paid monthly on the disbursed loan amount until the complete loan amount is obtained. Following this, regular EMIs will be allowed for the loan borrower.
A home construction loan disbursal usually ends when the property is finished. However, the applicant can choose to start the repayments quite early in case of any delays during the construction process.
- Tax Benefits
The home construction loan applicant can claim up to ₹1.5 Lakhs under Section 80C of the Income Tax Act for the repayment of the principal amount once the construction process is completed.
However, the tax benefits cannot be claimed in case the applicant has started to pay the EMI amount prior to the construction of the property. Also, the tax deductions have to be reversed in case the loan applicant sells the home within the next 5 years of constructing the house.
Section 24(b) of the Indian Income tax allows the loan applicant to claim up to ₹2.5 Lakh on interest after the successful construction of a self-occupied property.
- Any Deviation from the Approved Plan are Usually Excluded
The financial lenders usually require several essential documents from local municipal authorities, approved plan and property value before approving the home construction loan. In case the applicant makes any changes from the original approved plan such as violating the boundaries or extending beyond the approved area, then the financial lender has the authority to freeze your loan amount and will not release the next loan instalment.
If the applicant wishes to deviate from the original approved plan, then he/she will have to seek approval for the deviations which will take place when compared to the approved plan.
- Any Interior Works are Usually Excluded
Home construction loans are approved for only immovable works that are conducted for a house. This implies that any interior works such as painting, lighting, furniture, plumbing, cupboards, partition works and kitchen cabinets are not covered under the loan amount.
As of today, the interior cost of even a small property will cost around ₹3-4 lakh. It can go higher based on the luxury preferences of the property owner. Therefore, it is much better if the loan applicant checks with the financial lender with respect to the exclusions under the home construction loan.
The loan applicant must be aware of all the terms and conditions of a home construction loan to avoid any surprises or cash crunch in the future.