Before this incident I never heard of home construction loan.
One of our colleague was constructing a home for himself.
In this age of rapid urbanisation, he decided to construct a home all by himself.
Our colleague had set a lavish plan for himself.
We wondered how he was managing the finance for construction of his home.
He was planning to construct a really nice home. How he was planning to finance it?
This he did, by taking home construction loan, not our common home loan.
What is home construction loan?
I rang up the home loan department of a financing company.
The information I got from them regarding home construction loan will be shared here.
This knowledge share will prove useful for people me.
We also have a plot in my native place.
What if me and my father decide to construct home for our self in that land?
This idea was very motivating.
Everything will be tailor-made in our house as per our liking.
But I wanted to be surer about financing this home construction project.
The financing company with whom I was talking informed me that, the loan I seek information is called “home construction loan”.
Please note, this loan is not called “home loan”.
Almost everything is similar between a traditional home loan and home construction loan.
The Only difference lies in property documents.
The property documents required for home construction loan approval are more intricate.
The process and steps involved for approval of home construction loan is like this:
Home Construction Loan Process
- Step 1 – Verification of loan applicant
- Step 2 – Security Assessment of Property
- Step 3 – Loan Disbursement
#1. Verification of loan application
Here the verification of loan application and its requirement is done by the banks.
On basis of architectural plan developed by the architect, suppose the total cost of constructing home is Rs 35 lakhs.
One approaches a financing company with a request for Rs 35 lakhs for home construction loan.
The financing company will first check if the persons affordability.
Means, if the person has EMI paying capability for Rs.35 lakhs loan.
They will also check whether the requirement is authentic and trust worthy.
Affordability check will be done by the financing company based on ones credit rating.
#2. Security Verification of Property
Here the the authenticity of request is verified.
This verification is called as technical verification. This is done by experienced agency.
The agency will cross-verify the property valuation.
Technical verification is very crucial for banks before loan sanction.
This property will be kept as a mortgage by the bank.
Till 100% loan is paid back within loan tenure, bank can do anything with the property (within rules).
In case of multiple repayment defaults, the bank can auction the property and recover its cost.
This is a reason why property valuation check is done very judiciously by banks.
Legal verification is done by a nominated lawyer of the bank.
The lawyer will check if the property documents are authentic and reliable.
The objective of doing this is, in case of need, when bank wants to auction the property, at that time they shall not face any legal problems.
List of Documents Required for Home Construction Loan Approval
- Land’s Original Sale Deed on which one intends to construct home
- Proof of Land Tax paid
- Property Register Card issued in name of loan applicants
- Non Agriculture Land permission issued by district collector
- Search and title report
- Proof of tax paid under Urban Land Ceiling Act
- Sanctioned Building Plan
- Cost of construction of home as certified by a licensed architect
- Permission of Corporation to build a home
The process of techno-legal verification done by the bank ensures if the mortgaged property provided sufficient security to the bank.
Once bank is satisfied they will take the final step of loan disbursement.
#3. Home Construction Loan Disbursement
Loan disbursement can be effected once the legal and technical verification is completed.
Loan disbursement is generally done in form of cheque.
This check is signed by the home construction loan operations manager.
This cheque is handed over to the applicant once all formalities are completed.
Income Tax Savings due to Home Construction Loan
- U/s 24 – Rs 150,000 for the interest paid in a financial year
- U/s 80c – Rs 100,000 for the principal paid in a financial year
Other points about Home Construction Loan
Maximum Home construction Loan tenure is 20 years
After disbursal of home construction loan, construction of home must start within next twelve months
After disbursal of home construction loan, construction of home must be finished within next twenty four months
In the process of sanction of home construction loan, property valuation includes:
- Cost for constructing the property boundary wall.
- Cost of fixing permanent accessories for home like word work, modular kitchens, lighting system for home etc.
Interest rates for home construction loan are based on BASE RATES + Margin.
At present the base rate is approx 10%. Margin quoted by banks vary from 0% to 0.75%.
Processing fees are charged on home construction loan application. It is close to 1% of loan amount.
Repayment of home construction loan can be done by ECS or through PDC’s.
Stamp duty that will be levied on agreement papers shall be paid by loan applicant.