Home Construction Loan

Banks and Housing Finance Companies (HFCs) offer home construction loans for consumers looking to construct their residential home property on their existing plots. Lenders provide home construction loans to both existing home loan borrowers and new customers. Most lenders offer this facility either through their traditional home loan product or as an independent offering branded as ‘home construction loans’ within the broader category of home loans.

Eligibility for Home Construction Loan

The eligibility criteria is more or less similar to the regular home loan eligibility. Some of the key points about the home construction loan eligibility criteria are as follows:

• Lenders usually offer housing construction loans to both Resident and Non-Resident Indians (NRIs).
• Age: Banks and HFCs typically approve house-building loan applications from borrowers aged 18 and up. Most banks and HFCs require home construction loan borrowers to repay their loans by the age of 70.
• Both self-employed and salaried individuals are eligible for availing home building loan.
• Borrowers of home-building loans can add earning family members as co-borrower(s) or opt for a longer loan tenure to improve their eligibility for home construction loans.
• Credit Score: Loan applicants with credit scores of 700 or higher are more likely to qualify for housing construction loans. However, some banks and HFCs may offer home loans with lower interest rates to applicants with higher credit scores.

Lenders might also look at factors like a loan applicant’s income, work experience (for salaried applicants) or business continuity (for business owners), employer’s profile, occupation profile, etc. while ascertaining their eligibility for availing a home construction loan.

Features of Home Construction Loan

1. Loan-to-Value Ratio

The LTV ratio of housing construction loans is the total proportion of a property’s value that a lender can finance through the loan. The LTV ratio should not exceed the regulatory caps on home loan LTV ratios decided by the RBI. The breakup of loan amounts for home construction loans and their corresponding LTV ratios are mentioned below:

Besides, every lender decides the final LTV ratio of loan applicants based on factors including their credit profile, repayment capacity, etc. Note that some lenders may offer lower interest rates to loan applicants willing to increase their down payment contribution and thus opt for lower LTV ratios.

2. Loan Tenure

Banks and HFCs usually offer housing construction loans to applicants for loan tenures of up to 30 years. Lenders usually look at a loan applicant’s repayment capacity when finalising their loan tenure.

• They usually require loan applicants to limit their total EMI contribution, including the EMI of their proposed home construction loan, to be within 50-60% of their net monthly income. Thus, one should use the home loan EMI calculator to calculate the loan EMI based on various loan amounts, tenures & interest rates before making the loan application. This would help one to opt for a loan tenure that keeps his total EMIs, including that of the proposed housing construction loan to within 50% of their net income.

• They usually require loan applicants to limit their total EMI contribution, including the EMI of their proposed home construction loan, to be within 50-60% of their net monthly income.
• Thus, one should use the home loan EMI calculator to calculate the loan EMI based on various loan amounts, tenures & interest rates before making the loan application.
• This would help one to opt for a loan tenure that keeps his total EMIs, including that of the proposed housing construction loan to within 50% of their net income.

Availability of Balance Transfer Facility

Existing housing construction loan borrowers can exercise the home loan balance transfer facility to move their existing construction loan to another lender at lower interest rates. This facility allows existing loan borrowers to cut down their overall interest costs. Note that the new lender will conduct an exhaustive credit risk assessment of a loan applicant before approving their request for a balance transfer.

Processing Fees

Most lenders levy processing charges on applicants for home construction loans. It usually goes up to 2% of the total loan amount, with few lenders levying a higher charge on borrowers of a home building loan. Lenders may also waive off the processing fees on a partial or complete basis for loan applicants availing a home building loan.

Prepayment Charges

RBI guidelines prevent banks and HFCs from charging prepayment fees for housing construction loans availed at floating interest rates. However, lenders have the discretion to either levy or waive off the prepayment fees on fixed-rate home construction loans.