Home Construction Loan in India: Eligibility, Documents, Disbursal Process, EMI Explained

Everyone dreams of owning a home, but only a few can turn that dream into reality, often with the help of a home loan. However, many people are unaware that there are different types of home loans available in India. For instance, a home purchase loan is meant for buying a pre-constructed or ready-to-move-in residential property, whereas a home construction loan is designed to finance the building of a new house on a plot or land you already own.
In this article, we will learn in detail about home construction loans.

What Is Construction Loan?

A construction loan, also known as a self-construction loan, is a secured loan meant for individuals who wish to build a house or property on a plot or land they already own. While the loan amount varies from bank to bank, it is generally offered up to 70 per cent of the total construction cost. Similar to home purchase loans, construction loans are available at either fixed or floating interest rates. However, unlike regular home loans, construction loans are disbursed in stages, based on the progress of construction. The loan tenure is usually comparable to that of standard home loans.

Eligibility For Applying For Home Construction Loan

Like all other loans, eligibility for a home loan for self-construction depends on various factors, including income, employment status, and credit history. Additionally, the value of the land and the estimated costs of construction are taken into account.
Documentation For Applying For Home Construction Loan

The applicant must keep the following documents ready -
· Identity proof
· Income documents
· Property documents
· Construction plan approved by a local municipal authoritY

How Home Construction Loans Are Disbursed?

Unlike regular home loans, where the entire loan amount is disbursed upfront, a home construction loan is released in tranches. Initially, the borrower is required to contribute their share of the cost, after which the lender disburses funds in stages based on the progress of construction.

At each stage of disbursal, the borrower must submit photographs of the construction site along with certificates from an architect or civil engineer confirming completion of that particular phase. In some cases, the lender may also send its own engineer to verify the construction progress.

These additional procedures, which are not common in standard home loans, can sometimes delay construction. Therefore, it is advisable to keep some extra funds available to manage any such delays.

EMI Payment Of Home Construction Loans

Such loans involve pre-EMI interest, which is charged only on the amount already disbursed for the construction of the house. These pre-EMI payments cover only the interest component and do not reduce the principal amount. Once the construction is completed, the borrower is required to start paying regular EMIs that include both principal and interest.

In conclusion, a self-construction home loan is suitable only if you have sufficient funds to manage any unforeseen delays in construction or loan disbursements. It is also a good option if you are planning to renovate your home or add additional structures to an existing property.