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Searching for some financing options to build your own home on a plot is something, which requires a lot of time and efforts. Although, it is very much different from borrowing a home loan from any of the bank. When you ask for financing an existing home most of the banks approve your application if you meet the basic eligibility criteria. But, arranging the finance for home construction is different than that. When you ask for home construction loan there is nothing to be given as collateral, so the bank becomes more careful and check each and every document and aspects minutely to become fully assured about your project and repayment capacity. The bank evaluate your application on various parameters and one of the important factor is your repayment capacity along with the construction layout. In such stringent situation, it becomes more important to prepare well and do some home work before applying for home construction loan.
Find out how much you need to borrow? This is one of the most crucial and important question, what is your requirement? How much money do you want to borrow from the bank? The estimated cost of building the house that you have designed and engineered is the point of departure for establishing the amount of construction loan. Your architect or builder's construction plan and other documents will determine the estimated cost of building your home. In addition to the estimated cost bank always ask you to arrange some contingency funds, which is usually 5% to 10% of the actual cost. While offering you the loan, the bank wants full assurance about your repayment capacity along with availability of the surplus fund you require for completing the project on time. If there is cost overrun or if the unforeseen happens like changing the builder or increased material cost, in that case do you have enough funds to meet the difference of cost and complete the project without any hassle. So, it is very important to have some contingency funds apart from your share of construction cost.
Your credit score and repayment capacity: When you apply for a home loan, the banks usually look for market value of the property, your financial status, monthly income and repayment capacity to ensure that you will not default on payments. In loan against property, you will give your property as collateral and in case of default bank has all the rights to take possession of the property. But, while offering you a home construction loan for building a new home, the bank will look carefully at your financial status and repayment capacity as here you are not giving anything as collateral to bank rather you are building your equity. Therefore, before offering you home construction loan banks look for your credit history, monthly income, savings and repayment capacity and any other financial liability or existing loan.
In home construction loan, the ideal income-to-loan ratio should be 35% to 45%. It determines how much part of your salary can you use for repayment of your loan? If the ratio is more than the above, then there are chances that you will default in repayment. The lower income-to-loan ration also helps in getting the loan at very competitive rates. On the other side, low EMIs will also not affect your monthly budget much.
Using your land as collateral: If the bank is not happy and satisfied with your repayment capacity in that case you can use your land as collateral. It will help in acquiring the loan from the bank and at the same time it will also help in getting the higher amount as loan if the bank is not ready of offer to the required amount. In case, if you have another home for which you have already taken a loan and closed it successfully in that case banks will easily provide you loan without much hassle.