Home Loan For An Under-Construction Property
A home loan for an under-construction property is a type of financial product that allows you to borrow money to buy a property that is still under construction. When considering a house loan for a property that is still being built, it is critical to understand how it works. Obtaining a financing for an under-construction home differs from purchasing one that has already been completed. Special loan alternatives are available to aid with these types of properties, which are tailored to the construction schedule. This loan allows you to better manage your finances and stay on schedule with your home improvement project. In this article, we’ll go over the basics of obtaining a home loan for an under-construction property & how to make the most of it.
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What is an under-construction property?
An under-construction property is a building that is still being worked on but has not yet been completed. This indicates that construction is underway and that the property is not yet ready for occupancy.
Because many homes are unfinished, they may be missing essential components such as walls, floors, or plumbing. Construction is still underway, with workers, machinery, and materials on-site. Once completed, the property will be habitable.
Prices for such houses frequently rise as they approach completion. They can be a wonderful investment for people who are willing to wait until the construction is completed.
How does this work?
When you get a home loan for a property that is still being built, the bank sends you money in installments as the construction progresses. You only pay interest on the money you’ve received thus far. After the project is completed and you move in, you will begin making full monthly payments that include both the loan amount & interest.
Benefits
Lower interest rates.
A good credit score may allow you to obtain a loan with a lower interest rate, making borrowing money more affordable.
Reduced monthly payments.
Loans for under-construction homes are issued in phases as the work advances. You only pay interest on the money that has been issued, allowing you to make fewer monthly payments.
Affordable payments
Funds are distributed in stages as the building progresses. This manner, your monthly payments would remain manageable.
Long repayment period.
You can normally repay the loan in up to 30 years. However, the exact phrase varies depending on your age.
Types of home loans
Construction to Permanent (CP)
Construction-to-Permanent (CP) loans combine a construction loan and a standard mortgage. Here’s how they operate:
During the construction phase, the lender gives funds to cover building expenditures, and you just pay interest on the amount they have provided you. The builder completes the building, and inspections may be required at various stages. Once the construction is completed, the loan enters the permanent phase. At this time, the remaining loan amount is converted to a typical mortgage with monthly payments that include both principle and interest.
You choose the loan length (15, 20, or 30 years) and the interest rate. The property will serve as security for the mortgage.
The main advantages of CP loans are that they simplify the process by combining construction and mortgage loans into one, they may save you money with interest-only payments during construction, they allow you to lock in an interest rate while the house is being built, and they require only one closing for both the construction and mortgage parts.
Lenders will look at your credit score, income, & debt level to determine whether you qualify. A down payment is typically required, the builder must be approved by the lender, and the property’s value is determined by an appraisal.
Home Equity Lines of Credit (HELOC)
A Home Equity Line of loan (HELOC) is a flexible loan option that takes your home as collateral. You can borrow against the equity of your property, using your house as collateral. This means you can use the funds to cover large purchases or pay off high-interest debt, such as credit card payments.
A HELOC, like a credit card, provides a revolving credit line. You can borrow and repay as needed over the draw term, which typically lasts 5 to 10 years. During this time, you’ll make payments that often only cover the interest. The interest rate on a HELOC is variable and might fluctuate depending on market conditions.
When the draw time finishes, the HELOC enters the repayment phase, which typically lasts 10 to 20 years. During this time, you can no longer draw from the line of credit and must begin repaying both the principle and interest.
To be eligible for a HELOC, the amount you owe on your property must be less than its value, and you can normally borrow up to 85% of its value minus what you now owe. Lenders will also consider your credit score, income, & employment history. Some lenders provide the option to convert a portion 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 must meet the following criteria:
- Age: Your age should be between 18 & 70 years.
- Employment history: You must have at least 3 years of experience.
- Credit score: A CIBIL score of 750 or better is required for a fast loan approval.
Tax benefits are associated
During the construction of your home, you cannot immediately claim a tax deduction for loan interest. Instead, you can begin claiming this interest in five equal installments beginning the year the construction is completed or when you take possession of the property.
Section 24B
Section 24B of the Income Tax Act allows for a tax deduction of up to ₹2 lakh per year for interest paid on a home loan once construction is completed and ownership is obtained. This deduction includes current-year interest as well as one-fifth of construction-related interest.
Section 80C
While the property is under development, the tax incentives under Section 80C that apply to principle repayment do not apply. You can only claim these perks after you begin making EMI payments.
Section 80EEA
Section 80EEA, which goes into effect in 2020-21, provides a tax benefit under specific conditions.
Time taken for approval.
When applying for a loan for an under-construction property, the process normally consists of the following steps, which might take 4 to 8 weeks:
Submit your application: Begin by submitting your loan application with the required documentation, such as income verification and property information. This initial stage usually takes a few days.
Review and assessment: The lender will review your documentation, determine your creditworthiness, and investigate the property. This normally takes one to two weeks.
Property and legal checks: The lender then conduct a detailed check on the property’s legal status & construction approvals. This period can persist from one to two weeks.
Loan decision: Once all information has been confirmed, the lender will make a decision to authorize the loan. This normally takes an additional 1 to 2 weeks.
Release of funds: Following approval, the loan amount is disbursed gradually as work advances. This phase could take several days to a week.
Documents necessary.
- Identification and address proof
- Proof of Income
- No Objection Certificate (NOC).
- Builder’s documents or letters
- A stamped & registered agreement with the builder.
- Sale and Title Deed
- Khata Certificate
Loan-to-value ratio.
When applying for a loan for a newly constructed home, the loan-to-value ratio (LTV) is an important factor to consider. It compares how much you’re borrowing to the worth of the property. Lenders often prefer LTVs of 80% or lower. A lower LTV can mean:
- Increase your chances of being authorised for the loan.
- Help you get better interest rates.
- Eliminate the need for additional mortgage insurance payments.
Potential risks and challenges.
Consider the following risks while obtaining a loan for a property that is still under construction:
- Construction delays: The building process may take longer than expected, affecting your move-in date and budget.
- Interest-only payments: Initially, you will only pay the interest. Principal and interest will be included in your payments after construction.
- Price changes: Property values can change throughout construction, which might damage your investment.
- Builder reputation: Look into the builder’s history to avoid potential issues with project completion.
- Legal issues: Make sure the property has clear titles as well as approvals to avoid delays.
- Extra Costs: Budget for additional expenses like registration, stamp duty, as well as interior work.
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