Everyone wishes to have a home of their own, a place where you can share the joys and sorrows of life with your family. Not everyone will have the savings to build a house while there are others who do not wish to deplete their savings. For such people, there is a provision to use loans which you can pay back in small portions over a period of time.
You can make use of different kinds of loans to build your dream home. Of late, construction loans have gained popularity with the public.
Taking any kind of loan has its own risk. Below are given a few important points that you need to know about construction loans.
- Construction Loan
What is a construction loan? The main thing about it is that it only lasts for the period of time it takes to construct a house. You may have applied for a construction loan of a certain amount. But unlike conventional loans, the amount will be disbursed to you in installments.
- Eligibility Criteria
Once you apply for a construction loan, the financial company will do a thorough background check on you. They will check your financial history and see if you are eligible to pay back the loan, based on your credit rating. They will also check the loan application for authenticity, the stability and continuity of your income, the number of people that financially depend on you etc. Only then will you get your loan approved.
- Documents Required
A lot of documents need to be submitted to the financial company before your construction loan gets approved. It will vary in different financial companies. It will also depend upon whether you are a salaried individual, entrepreneur, self-employed etc. Generally, you will be asked to submit a photo ID proof, PAN card, residence proof, bank statements and salary certificate (if applicable).
- Estimation of Cost of Construction
After approval of your construction loan, it is not necessary that the lender will provide the amount you requested. So it is considered a good practice to have an estimate of the cost of construction ready with you. This will increase your chances of getting the amount you requested.
- A Contractor to Oversee
We all have our own particular ideas when it comes to building a home. We might also wish to have a one-on-one involvement when it comes to its construction. Even though it sounds like a good idea on the surface, you might face difficulty as the project progresses like the unavailability of workers, issues with conforming to the building regulations of your state etc. Experts advise you to employ a seasoned contractor to oversee the construction. Take care that the person is trustworthy and reliable. But nevertheless, you should be closely involved with the progress of construction.
- Repayment Rules
The way you pay back your construction loan also differs from the way you pay back a conventional loan. The money is given to you in installments and you need to pay interest for each of them during construction. Keep in mind that this interest will not go into repaying the principal amount. The principal amount needs to be paid back separately, once the construction is over.
- A Double Edged Sword
The biggest advantage of getting a construction loan is that, you need to pay only interests during the construction. The main amount needs to be paid back once you take possession of your home. The other side of this coin is that, there is no guarantee that the construction will be finished in the estimated time. This can lead to an increase in cost, which your loan may not be accommodating.
- Income Tax Benefit
You can also avail of Income Tax benefit for a construction loan, the interest component of the monthly instalments can be claimed as deduction.
Like any other loan, a construction loan has its pros and cons. Before you decide to apply for it, it is advisable to do some research or better still, find an expert to guide you through the process.