When you have a plot of land, one thing that makes a lot of sense is to build a house on it. But that’s easier said than done. More often than not, it’s difficult to find the money to get the construction done. That’s where you should look at a Home Loan for constructing the house yourself.
A Home Construction Loan is a loan where you can use the money to construct the house that you want, instead of having to buy something that’s pre-built by a builder. You should look into this if you’re ready to build a home of your own.
However, as with any loan, you should familiarise yourself with the nuances before you apply for the loan. That saves you a lot of time and hassle that you could otherwise avoid.
If you’re new to the very concept of a Home Loan, then you aren’t alone. Here are a few things you should be aware of.
Ownership of the land: The names of the people who own the land and the role they play is important, since the bank will want to know all of this. You should specify the origin of the land. It can be something you bought off another person. It can be something that was a part of your inheritance. Whatever the case, the bank will want to know, for the following reasons.
a.) If the land is located in a community or complex with all facilities like electricity and water already attached, then the bank will be a lot more ready to give you a loan to ensure that you can get started on the construction.
b.)If it’s an independent piece of land, then you should have all the clearance documents from the government. It’s important that the land is not designated for agricultural or commercial use.
c.)If it’s inherited from family, then there can be ownership issues if you have siblings. The loan will not be sanctioned if everyone who owns the land hasn’t agreed to the loan. In alternative case you can either persuade your siblings for Joint Home Loan as their are multiple benefits that you gain from Joint Home Loan.
d.)Another ownership issue comes in if the land is owned by a trust or an educational/religious institution. There can be a lot of problems that come with that, and banks don’t typically take kindly to that. They’ll even refuse your loan application if that’s the case.
The Loan to Value Ratio: If the land has no loans attached to it, the funding for construction can go up to 100%. The bank you pick will have their own method of analysing the amount of loan they can sanction. They’ll also keep in mind the market value of the land.
The Important Documents: Unlike a regular Home Loan, the documents required for Home Loan meant for construction are slightly different. You should start with a well sanctioned plan from town-planning authority in order to prove that all planned construction is legal. The contractor must also give you an estimate of how much the entire construction will cost. That also has to be given to the lender, since it’s with this that they’ll decide how much to sanction to you. You’ll also need to provide updated tax payment records of the land.
What Can’t be Funded: This isn’t a run of the mill Home Loan. There are costs that any lender will refuse to fund. You will be required to justify any cost that the lender feels goes above and beyond the regular and average costs. Besides that, you’ll have a hard time finding a lender who will give you a home loan for a large amount when the land value is a lot lower.
Arwind Sharma is a financial advisor with an experience of more than 7 years. He has worked for topmost financial firms in India and has been a visiting faculty at many reputed institutes in India. Currently based in Pune, Arwind Sharma is a name to reckon with when it comes to financial management for big brands. A post-graduate in business economics, he is an alumni of Princeton University, USA. During his free time, Arwind teaches children from marginalised sections of society and also work on his blog.