5 Things You Need to Know Before Applying For Home Construction Loan

There are several kinds of home loans that are offered by banks and financial institutions to customers. One of these types is the home construction loan. It is a specific home loan where the bank sanctions funds for customers to build their homes instead of buying apartments. The money is paid in stages as per the progress of the construction work. Borrowers have to offer extensive construction timelines to lenders along with the construction plan and the accurate budget. Lenders may inspect the construction site or get this done by a third-party team. On that note, here are the 5 things that you need to know before you apply for a home construction loan. 

What Should You Know Prior to Applying? 

Here are a few things that should be noted carefully before applying for a home construction loan. 

1. There are several kinds of construction loans- You can choose a self-construction loan if you already have a plot or have bought one. There is also a plot + construction loan which will cover both these costs. Home renovation or extension loans are also available for reconstruction or renovation purposes like adding new rooms or floors to your home along with other repair work and repainting. 
2. Smaller tenures- A home construction loan usually comes with a much shorter tenure in comparison to a regular home loan. You should enquire about the maximum tenure from the lender and whether you are eligible for the same. It is usually 10-15 years although it may vary across lenders. 
3. Check your eligibility- Are you eligible to take a construction loan? Make sure that you have a good credit score. The higher your credit score, the better your chances of getting your loan sanctioned from the bank. You can ensure this by repaying your dues timely and clearing off debts promptly. Check the tenure and the loan amount while calculating the monthly EMI that is payable from your end. Make sure that this sum does not cross 50% of your overall income each month. 
4. Be prepared for extensive documentation- Home construction loans require sizeable documentation on the borrower’s part. Hence, you have to keep your property papers handy, including the deed/title of the plot, other approvals for construction, the construction plan, official Government sanctions, timelines, construction budget, resources required for construction, property size, contractor details, and so on. You should always have these documents handy before applying. 
5. There may be cost overruns while constructing your home- While the home construction loan amount will be based on estimated costs, there may be a few extras that can crop up throughout the journey. For instance, the costs of a few raw materials may increase or you may have to pay more for unforeseen labour and other delays. Hence, you should assure the bank that you have sufficient savings and investments to cover up these unexpected costs. Always have 5-10% of the total cost in hand as an emergency fund before you start. 

Remember that a home construction loan is not hard to get, provided you meet the eligibility criteria and have a good credit score. You will also have to furnish legally-valid and proper property documentation along with timelines and other details as mentioned above. Make sure that you work with reputed contractors and professionals for your house-building project. This will naturally enhance the lender’s confidence while processing the application. Make sure that you have a solid plan that accounts for the disbursal of the funds in increments based on progress. 

Keep an eye on the pre-EMI payments that you may have to start making on your loan. These are payments that only contain the loan’s interest component. The lender may ask you to start paying the same before the actual disbursal of the loan amount. Check whether this clause is present in your loan agreement or not. Make sure that you have a suitable co-applicant for the loan if the plot or under-construction building is co-owned. A stable job or source of income will always go in your favour along with sound financial circumstances. On that note, here’s to successfully applying for a home construction loan and making your home ownership dreams come true.