In this competitive real estate market and rocket high price of houses, it is not easy for every \one to buy a home within their budget. Ronak, who is a showroom owner, has recently bought a plot to build a house. But, with high price of construction and material he is not able to cope up with the increasing cost of construction. He has already invested all his funds in buying the plot as he wanted to own an independent home. Now, he is not left with enough money to start construction on his plot. One of this friend suggested him to borrow the construction loan from a bank, if he wants to start the construction work soon. This idea of borrowing loan from any of the bank or NBFC sound’s nice as it solved his problem of funds.
He applied for home construction loan to a bank and complete all formalities of application and documentation required for application process. He was in an impression that after completing all the formalities and submitting the documents he will be able to get the home construction loan approved easily. But, he was surprised when bank asked him to come and apply once again after completion of lintel level of the house. There are many people who apply for a home construction loan don’t have any idea about the terms and conditions of the home construction loan. Here are some important points, which one should know before approaching the bank for home construction loan.
Loan disbursement happens in phases: If you are in an impression that bank would offer you 100% of the construction cost and provides you a lump sum amount towards your home construction expenses, then you are totally wrong. The disbursement in home construction loan is done in different phases or in installments only. Generally, the banks disburse the loan amount in two-five different phases, which mainly depends upon the progress of the construction, loan size and loan to value ration. Therefore, it is very important that you should have some funds in your hands before you apply for a loan to pay for the raw material and other stuff once you start the construction and get the loan amount disbursed.
Loan disbursement is linked with construction’s progress: Almost all the banks have a pre-defined disbursement criteria for allocating the home construction loan. The banks disburse the loan based on the progress of the construction of the house only. For instance, if the bank approved your application of home construction loan for the 80% of the total estimated cost of the construction as loan, the first chunk of amount will be disbursed after completion of foundation work, assuming that 15% of the estimated cost goes for it. The bank will disburse the second share of amount once the lintel level of construction will be competed. The third part of amount you will receive after completing the concrete works and the full and final payment will be done when 90% of the construction activity will be over.
But, if you are applying for half of the amount or 50% of the estimated cost as loan, in that case, the first round of loan disbursement will take place after completion of the lintel or when the concrete works get over. The disbursement of this loan is linked with the construction only, so it you suspend the construction or delay the project the bank will also either suspend the remaining amount or delay the payment of the remaining amount accordingly.
Keep paying pre EMIs, until final loan disbursement: If you are availing the home construction loan and have not received the final payment of the loan, still you are supposed to pay the pre-EMIs of the loan. This means that you are required to make the pre EMI payments against the interest of the loan which has been disbursed in installments. You will make the pre-EMIs against the interest amount of the loan, but not against the principal amount of the loan until you will not receive the final share of the loan amount. In case, if you will delay or suspend the construction activity due to whatever reason, still you are supposed to pay the EMIs of the interest amount during that period also.
Violation of approved plan can result hazardous: Before approving your loan application and offering you a loan amount, the bank ask for various documents including sales deed, approved plan, NOC from the municipal/corporation authorities etc. Once you get the loan approved and after that if you will make any changes in the approved plan or violating the boundaries, extension beyond approved area etc, the bank has all the right to delay your loan disbursement, hold or freeze the remaining funds. In that situation, you are required to take additional approval for any deviations taking place from the approved plan or with the construction estimate submitted to the bank.
Limited tax benefits: If you will borrow the home loan for that you can claim the tax benefits for both principal and interest amount. But, for a home construction loan you will get tax benefits only for the interest paid if the construction activity is not complete. According to that, if you will opt for Tranche EMI option, which means the option for starting your EMI after the first installment, you can’t avail the tax benefits for principal portion paid against the loan, until the construction gets over and the bank certifies that they have disbursed the full and last installment of the loan amount.
No inclusion of any interior work: The home construction loan is available for immovable works conducted for a house. This means that interior works such as painting, furniture, cupboards, kitchen cabinets, and other wooden work, lighting and plumbing work is not included in the loan amount. This means for all these expenses you have to make payments from your end. So, while going for luxurious interior work ensure that you have enough funds to carry out the work as all this is not included in the home construction loan.