Take out a home construction loan? Here are the key things to know

Building a house is an exciting experience in itself. It gives you the flexibility to design and customize your home to suit your budget, needs and lifestyle. But it’s no surprise that building a house is no small feat and requires critical decision making. Throughout the process of building a house, you must take care of all the finances necessary to cover the costs of the project.

However, for most people, being ready with cash to pay for the construction of a new home is not possible. Fortunately, in such situations, construction loans finance the materials and labor needed to build a new home.

It is important to know that the process of a home construction loan is different from that of a regular home loan. If you feel a little too overwhelmed with the process and options, don’t be!

In this article, we have compiled a guide on how to steal a deal when applying for a home construction loan:

Be pre-approved:-

While availing a home loan or construction home loan, it is always advisable to pre-qualify for it. Indeed, once you have been pre-approved, before going too far, you will know the amount to which you are entitled. Once you know your borrowing limits, you should have no problem getting the loan, all you need to do is show up with the necessary documents and a trusted contractor. This way of being pre-qualified can help you get some of the best home construction loan deals.

Numerical penalty: – Of all the other important steps in the loan process, the most crucial is getting the sanction letter on time. Advances in fintech have rapidly transformed the way banks and credit institutions operate. As part of the online home loan acquisition process, lenders have now expedited which provides an instant digital loan sanction letter (2-3 days max). All you have to do is fill in the electronic form by providing your personal and asset details. Before accepting the offer, carefully review the loan document and finally pay a small fee to download the digital home construction loan sanction letter.

As the name suggests, having a digital sanction letter is only the initial approval and not the final loan agreement. It comes with many home loan conditions such as sanctioned loan amount, interest rate, length of tenure and validity of letter. Once you know the parameters, you will know if you are happy with the initial offer and can move forward with the deal or not. Otherwise, you will always have the opportunity to compare the offer with other lenders. Additionally, once you have proof of eligibility for a loan, it can be used to negotiate with your real estate agent.

Ask PMAY (for affordable houses):- Launched in 2015, the government’s Housing for All program is a mission that was launched to provide central assistance to eligible beneficiaries until 2022. The idea is to extend the flow of credit to the urban poor to cover their housing needs. Under the program, eligible urban poor such as EWS and LIGs receive credit-linked subsidies on housing/construction loans. The maximum credit grant given to the eligible is Rs 2.20 lakh.

Advantages of female ownership:– Low interest rates, ease of eligibility and other benefits have certainly encouraged women to become homeowners and apply for home loans. As over time women in the country become financially independent, many of them make important life decisions like buying a house or building a new house for their family.

With this, lenders are now creating special programs for women to make it affordable for them. For example, the interest rate granted to them is slightly subsidized, which has a significant impact on EMIs and the overall interest payment. As mentioned above, the government provides interest subsidy of up to 2.67 lakh to eligible women. It’s a way of trying to make the woman the owner/co-owner of the house.

Loan disbursement process: – It is important to note that the type of disbursement of loan amount is different in construction loans. It is not disbursed in one go as is the case for a mortgage. Therefore, to save money, the borrower must exercise caution. Typically, most banks repay the approved loan in about 3-5 installments. This means that for the lenders, you have 20% of the amount you are going to invest to buy the raw material and start the process.

Additionally, your builder can give you a payback structure based on their estimates that is negotiable on your end. In one case, if you think that the construction is not progressing at the required and committed rate, you can ask your lender to stop the payments to avoid losses.

The author, Atul Monga, is co-founder and CEO of BASIC Home Loan. Opinions expressed are personal

First post: STI