Home loan for under construction property

When looking at a home loan for a property that’s still being built, it’s important to know how it works. Getting a loan for an under-construction home is different from buying one that’s already finished. Special loan options are available to help with these types of properties, and they are designed to fit the construction schedule. This loan helps you manage your finances and stay on track with your home project. In this blog, we’ll cover the basics of getting a home loan for an under-construction property and how to make the most of it.

See also: When can a bank reject your home loan application?

What is an under construction property?

An under-construction property is a building that is still being worked on and isn’t finished yet. This means the building process is happening, and the property isn’t ready for people to move in.

These properties aren’t finished, so they might be missing important parts like walls, floors, or plumbing. Construction work is still happening with workers, machinery, and materials on-site. The property is meant to be lived in once it’s completed. 

Often, the prices of such properties tend to appreciate  over time as they near completion. They can be a good investment for those who don’t mind waiting until the construction is complete.

How does it work?

When you take a home loan for a property that’s still being built, the bank gives you the money in parts as the construction goes on. You only pay interest on the money they’ve given you so far. After the building is finished and you move in, you’ll start paying full monthly payments that cover both the loan amount and interest.

Benefits

Lower interest rates

With a good credit score, you might get a loan at a lower interest rate, making it cheaper to borrow money.

Reduced monthly payments

Loans for under-construction homes are given out in stages as the building progresses. You only pay interest on the money that’s been released, which means your monthly payments can be lower.

Affordable payments

Funds are provided in parts as the construction moves forward. This way, your monthly payments stay manageable.

Long repayment period

You can usually repay the loan over up to 30 years. However, the exact term can depend on factors like your age.

Types of home loan

Construction-to-Permanent (CP)

Construction-to-Permanent (CP) loans are a type of financing that combines a construction loan with a traditional mortgage. Here’s how they work:

During the construction phase, the lender provides money to cover the building costs, and you only pay interest on the amount they’ve given you. The builder completes the construction, and inspections might be needed at different stages. Once the building is done, the loan shifts to the permanent phase. At this point, the remaining loan amount is changed into a standard mortgage with regular payments that include both principal and interest. 

You select the loan term (like 15, 20, or 30 years) and secure an interest rate. The property will be used as collateral for the mortgage.

The main benefits of CP loans are that they make the process easier by combining construction and mortgage loans into one, potentially save you money with interest-only payments during construction, let you lock in an interest rate while the house is being built, and involve just one closing for both the construction and mortgage parts. 

To qualify, lenders will check your credit score, income, and debt level. You usually need to make a down payment, the builder must be approved by the lender, and an appraisal is done to determine the property’s value.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a flexible credit option that uses your home as security. You can borrow against the equity in your home, with your house serving as collateral. This means you can access funds for big expenses or to pay off high-interest debt, like credit card bills.

A HELOC works like a credit card, offering a revolving credit line. You can borrow and repay as needed during the draw period, which usually lasts 5 to 10 years. You’ll make payments that often cover just the interest during this time. The interest rate on a HELOC is variable and can change based on market conditions.

Once the draw period ends, the HELOC moves into the repayment phase, which generally lasts 10 to 20 years. During this period, you can no longer borrow from the line of credit and must start repaying both the principal and interest. 

To qualify for a HELOC, the amount you owe on your home must be less than its value, and typically, you can borrow up to 85% of your home’s value minus what you already owe. Lenders will also look at your credit score, income, and employment history. Some lenders offer the option to convert part of the variable-rate balance to a fixed rate.

Eligibility criteria

To qualify for a home loan for an under-construction property in India, you need to meet certain criteria:

• Age: You should be between 18 and 70 years old.
• Employment history: You need at least 3 years of work experience.
• Credit score: A CIBIL score of 750 or higher is required for quick loan approval.

Tax benefits associated

During the construction of your home, you can’t immediately claim a tax deduction on the loan interest you pay. Instead, you can start claiming this interest in five equal parts from the year the construction is finished or when you take possession of the property.

Section 24B

According to Section 24B of the Income Tax Act, you can get a tax deduction of up to ₹2 lakh per year on the interest paid for a home loan once the construction is complete and you own the property. This deduction includes interest for the current year and one-fifth of the interest paid during construction.

Section 80C

Tax benefits under Section 80C, which apply to principal repayment, don’t apply while the property is under construction. You can only claim these benefits once you start making EMI payments.

Section 80EEA 

Starting from the 2020-21 assessment year, Section 80EEA offers a tax deduction under certain conditions.

Time taken to for approval

When applying for a loan for an under-construction property, the process usually involves these steps and can take around 4 to 8 weeks:

Submit your application: Begin by sending in your loan application with all necessary documents, like income proof and property details. This initial step often takes a few days.

Review and assessment: The lender will check your documents, evaluate your creditworthiness, and look into the property. This typically takes about 1 to 2 weeks.

Property and legal checks: Next, the lender performs a thorough check on the property’s legal status and construction approvals. This stage can also last 1 to 2 weeks.

Loan decision: Once everything is verified, the lender will make a decision and approve the loan. This usually takes another 1 to 2 weeks.

Release of funds: After approval, the loan amount is disbursed in phases as construction progresses. This step may take a few days to a week.

Documents required

• Identity and address proof
• Proof of income
• No Objection Certificate (NOC)
• Builder’s document or letter
• Stamped and registered agreement with the builder
• Sales and Title Deed
• Khata certificate

Loan-to-value ratio

When getting a loan for a property that’s still being built, the loan-to-value ratio (LTV) is an important consideration. It measures how much you’re borrowing compared to the value of the property. Lenders generally prefer an LTV of 80% or lower. Having a lower LTV can:

• Increase your chances of getting approved for the loan.
• Help you secure better interest rates.
• Remove the need for extra mortgage insurance payments.

Potential risks and challenges

When getting a loan for a property under construction, keep these risks in mind:

• Construction delays: The building might take longer than expected, affecting your move-in date and finances.
• Interest-only payments: Initially, you’ll pay just the interest. After construction, your payments will include both principal and interest.
• Price changes: Property values can change during construction, which might impact your investment.
• Builder’s reputation: Check the builder’s history to avoid potential issues with project completion.
• Legal issues: Make sure the property has clear titles and all approvals to avoid delays.
• Extra Costs: Budget for additional expenses like registration, stamp duty, and interior work.

FAQs