Guide to Loan for House Construction
You have spent countless nights planning for your dream home – from the spacious kitchen where you will cook family dinners to the cosy corner where you will curl up with a book. Now, you are ready to turn this planning into an execution by building your own house. However, proceeding with such a project requires careful planning, especially when it comes to financing. This guide will walk you through everything you need to know about loan for house construction.
How Does Loan for House Construction Work?
When you apply for a home loan for an under-construction property, the lender does not disburse the funds at once; instead, the payment is released based on the construction stage. For example, if the contractor drafts an agreement with an expected construction completion tenure of 12 months and divides the entire process into four stages, the lender will release the funds in tranches based on the estimate provided for each stage.
It is important to mention that until the entire disbursement is made, you are required to pay only the interest on the released funds, and the EMI does not include the principal repayment amount. This whole repayment concept is called pre-EMI.
Stages of House Construction
As you know, a home construction loan is disbursed in stages. Here are the details.
Stage 1: Planning and Designing
In this stage, you ask your architect to prepare a layout for your house. This involves choosing the architectural style, deciding on the number of rooms, and creating a blueprint. Remember, the lender may ask you to furnish a copy of layout and design to understand the cost of home construction.
Stage 2: Permits and Approvals
Next, you will need to obtain the necessary permits and approvals from local authorities. Some certificates you must acquire include the completion certificate, occupancy certificate, and environmental clearance certificate. Once more, the absence of these documents can lead to rejection of your loan application.
Stage 3: Site Preparation:
This stage involves clearing the land, levelling the ground, and marking the foundation layout. You will need to hire contractors to clear debris from the building site. Your lender may not fund this process, so you will have to arrange the funds on your own.
Stage 4: Foundation Construction
The foundation is crucial as it supports the entire structure. This stage involves pouring concrete into excavated trenches according to the architectural plans. For example, the labourers will lay the reinforcement steel bars (rebar) in the foundation trenches, pour concrete over them, and let it cure.
This is the first stage when the lender releases the funds.
Stage 5: Building the Framework
This is the next stage of fund disbursement. At this point, the contractor erects walls, floors, and roofs that define the basic shape of the house. They may use timber or steel beams to construct the skeletal framework.
Electrical Installation:
Once the framework is up, the focus shifts to installing essential systems like electrical wiring, plumbing pipes, and heating/cooling (HVAC) ductwork.
Electricians will wire the house for outlets, switches, and lighting fixtures, while plumbers will install water supply lines and drainage systems.
Finishing Stage
This stage is divided into interior and exterior finishing. In the former, the work involves flooring, cabinetry, countertops, and painting walls. For instance, flooring specialists might lay tiles or hardwood floors, while painters will apply primer and paint coats to achieve the desired colour scheme.
In exterior finishing, the contractor instructs labourers to work on siding, roofing, and windows to protect the house from the elements.
Tips to Boost Chances for Loan for House Construction
When applying for a construction loan, keep the following factors in mind.
- Lenders often consider your credit score to assess your creditworthiness. Aim for a score above 750 by paying bills on time and managing credit responsibly.
- Save for a downpayment payment. A larger down payment demonstrates your financial stability and reduces the loan amount, making you a more attractive borrower to lenders.
- Lower your existing debt burden to improve your debt-to-income ratio. This shows lenders that you can manage additional debt from the construction loan.
- Organise all required financial documents such as income statements, tax returns, and property documents. Having everything ready speeds up the loan approval process.
- Research and compare lenders to find the best terms and interest rates. Different lenders may offer varying loan conditions, so choose one that suits your financial situation and construction plans.
- Use a housing loan calculator to understand how much money you will need each month to pay off your EMIs without compromising on other obligations.
Conclusion
A house construction loan is an excellent way to fund the dream of building your own home. Whether you are constructing a custom-built home or planning to build on a plot of land you already own, this loan can assist.
