The moment you start earning money, your final dream is to have your own home someday in this life. Some of us might have the land to build a house on but lack the funds to start construction. The savings of an average earner can’t outrun the construction price and inflation over some time. This is where home construction loan step in, making your dream come true while offering unique benefits that set it apart from regular mortgages. This article speaks about the intricate details of home construction or home improvement loans and the financial benefits that they offer, especially for a middle-class person.
What are Home Construction Loans?
Home construction loans are specialized forms of loans that help the borrower build their home from the ground up. Mostly, loans are provided in two stages, firstly the initial construction amount and then being converted into a permanent mortgage. Depending on the progress of the construction, the lender disburses the amount in stages. As a borrower, you provide the lender with construction timelines, a construction plan, and a budget.
What are Home Improvement Loans?
Many of us might already have our homes, which have turned out old and need repairs or renovation. You might also have a house in good condition but need to construct an extra floor at the top of your house. You can avail of this loan for these purposes and rebuild, renovate, extend, and repair your existing home.
What are the pros of this loan?
1. You become eligible to claim a deduction on the interest component of your construction loan as per Section 24 of the Income Tax Act. As long as the property is for residence purposes upon completion, you can deduct the entire interest amount paid on the construction loan within 24 months before the finalization of your home.
2. If you belong to a middle-class service background, then the loan allows you to have a home of your own from the ground up while you continue working and paying off the loan, offering financial flexibility and saving you from financial burdens.
3. Many banks in India offer a fair interest rate ranging from 6.5% - 9% p.a. Some banks also offer fixed interest rates and save you from any unexpected increase in interest rates over the construction period.
4. You don’t have to pay the interest on the total amount sanctioned but on the amount used in stages.
5. It has long repayment tenures, saving you from EMI burden every month.
6. You will be building an asset for yourself, which has an appreciating value every passing day, giving you returns more than any FD or MF.
What are the cons of this loan?
1. Multiple unforeseen situations and contingencies in construction occur, which might adversely affect your financial planning. As an example, the material price, strikes, labor cost, etc.
2. In an unavoidable circumstance of abandonment of a construction project, the liability will be with the borrower as he or she must pay for the interest charged.
3. The real estate price fluctuations must also be scrutinized while planning on the construction and its budget allocation.
4. Typically, the processing fee for such loans is higher and can be an added amount to your spending.
What are the requirements?
- KYC Documents
- Proof of Income
- Property Documents
- Address Proof
- Municipal corporation approval notice
- Construction drawings
- A good credit score
- Construction Budget
- Construction Plan
What are the factors that affect loan eligibility?
The source of income and its certainty is one of the key points to be assessed by the loan officer to avoid future mishaps. You must be able to present your recurring proof of income, be it your employment, any liquid funds or investments, or any profitable business. The second important thing that a loan officer verifies is your credit score. A credit score is the ability of repayment that you might have taken to date in the form of credit cards and small loans.
What are the types of Construction Loans?
1. Self-building Loan: This is in the case where you already have land or can buy land yourself but need a loan for constructing your home, a self-building loan can be your choice.
2. P & C Loan (Plot and Construction): When you are willing to buy the land and construct the house on it, the bank may offer you the loan for both depending on the criteria of individual banks.
3. Home Repair Loan: When you already have a house constructed on your land where you’re just looking to extend a floor or two or any renovation work, choose this loan.
Conclusion:
The home construction loan or the home improvement loan can be great options for middle-class people who dream of having and living in a home of their own. Securing the loan could be a treacherous task as banks go through multiple verification checks before any sanction or disbursement of the loan. Maintain a great credit score, have the proper documentation, and show proof of income, your loan requirement, and approval notices, making you eligible to avail the benefits of this loan provided by multiple banks across India.
Before finalizing your loan, check if you have all these documents and are sure about your future income sources, then you can opt for the loan. If your income is affected in the future, the bank will not give you any extra time and might take a part of your property to recover their loan amount. One of the major fluctuations can be the building material cost which has been always increasing day by day and therefore we need to take this as a major consideration while planning. Look for both the pros and cons in your situation and decide whether you can go for the loan or not. Therefore, be vigilant, pay attention, plan wisely, and construct the house of your dreams.
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