Home Loan for Construction

Housing requirements can be varied. And housing loans are no exception. Home Loans come in a variety, catering to different needs and purposes. Unlike the traditional home loan, a home loan for construction is offered for buildings constructed right from scratch. These constructions may be for housing or commercial purposes. Say you’ve cracked an amazing deal and bought a piece of land. Now, a construction loan would help you finance everything required, from raw materials to labour, to help carry out the construction.

Home construction loans are offered by banks either under the traditional ‘home loans’ category or as a separate category itself. Moreover, there are limited lenders that specifically offer construction-based home loans. The land on which the construction is to be carried out is mortgaged with the bank, and the amount is usually disbursed in phases as and when the need arises. Today, we take a comprehensive look at these loans, exploring the house construction loan interest rates, eligibility criteria, documentation and much more.   

Home Construction Loan Interest Rates 

Different lenders charge different house construction loan interest rates. This interest rate further affects the EMIs on the borrowed amount. Take a quick look at the interest rates charged by some of the leading lenders in India:

Lender	Interest Rate (p.a.)
LIC Housing Finance Ltd.	8.40% onwards
Bank of Baroda	8.40% onwards
PNB Housing	8.50% onwards
Bajaj Finserv	8.50% onwards
TATA Capital	8.70% onwards
HDFC	8.75% onwards
SBI	9.15% onwards
ICICI Bank	9.25% onwards

Home Construction Loan Eligibility Criteria for Salaried Employees

The construction loan eligibility criteria for salaried borrowers are as follows:

• Age: 18-70 years
• Minimum Work Experience: 1-2 years with the current employer 
• Minimum Monthly Income: As specified by the bank
• Credit Score: 750 or Higher
• Citizen/Resident: Indian

Home Construction Loan for Self-employed

Construction loan eligibility criteria for self-employed borrowers are listed below:

• Age: 21-65 years
• Minimum Business Age: 1-2 years of the current business
• Minimum Income: As specified by the bank
• Credit Score: 750 or Higher
• Citizen/Resident: Indian 

Home Construction Loan Documents Requirements

Borrowers should keep the following documents handy while submitting a construction loan application:

• Duly filled loan application
• KYC Documents: Identity Proof (Aadhar card, voter’s ID, etc.) and Address Proof (Utility bills, Aadhar Card)
• Business/Employment Proof: Employee ID card, Registration of business etc.
• Income Documents: Salary receipts, bank statements, IT returns, Balance Sheet and P&L Account, Other documents
• Property Related Documents: Plot registration, Encumbrance certificate, Approved Plan Copy, etc.
• Other documents as specified by the bank

Features of Home Construction Loans

House construction loans offer multiple advantages to their borrowers. Here are some of the features that make it stand out from the rest of the loans:

• Shorter Tenure: Loan tenures are much shorter as the loans are sanctioned only till the completion of construction. 
• Refinance Facility: Borrowers have the option to refinance these loans at the end of the tenure or convert them into standard home loans.
• High-Interest Rates: Under-construction properties are considered to be riskier. Thus, construction loans are usually offered at high-interest rates.
• Interest-Only Repayments: Borrowers are allowed to repay only the interest obligation on the loan till the construction goes on. This helps ease the repayment burden and makes loan settlement a lot more easier. 
• Up to 90% Loan to Value Ratio (LTV Ratio): As per the latest RBI home loan guidelines, banks in India can finance up to 90% of your construction using these loans.
• Secured Loan: These are secured loans where the under-construction property itself is kept as collateral. In case of failure of loan repayment, the lender possesses the authority to use this land to recover their losses.

Home Loan Vs Construction Loan – Key Differences

Take a side-by-side look at construction loans and standard home loans.

Basis	Construction Home Loan	Standard Home Loan
Purpose	To construct a new property, right from scratch	To buy an already-constructed home or an under-construction property
Loan Disbursement	Disbursed in instalments as the construction process progresses	Full amount sanctioned at once
Interest Rates	Higher interest rates due to higher risk and lesser demand	Comparatively lower interest rate due to high market competition
Loan Tenure	Short-term loans, ranging from 7-15 years	Long-term loans, ranging up to 30 years
Repayment	Only interest repayments are made during construction. Principal repayments can commence upon the completion of the construction.	Repayments begin immediately after the disbursal of the loan amount.

Types of Home Construction Loans

Different lenders offer different types of house construction loans. Depending upon their specific needs, borrowers can choose from the following types of loans:

• Self-Construction Loans: A borrower who has already purchased the property and requires funds only to construct the home can opt for self-construction home loans. 
  
• Plot Construction Composite Loans: Borrowers who require monetary assistance for land purchase as well as property construction can apply for these loans. These loans combine the features of a plot loan and a construction loan.
• Home Renovation/ Improvement Loans: Renovation loans help revamp, while improvement loans help extend existing homes.