Home Loan vs Home Construction Loan-Differences

Every person aspires to live in their ideal home. However, with real-estate prices on the rise, it’s nearly difficult for folks to pay for a home out of pocket. Regardless of the sort of home you want to buy, a home loan can provide you with the necessary funds. Home loans are available from both banks and housing finance firms. You can choose the correct house loan for various things. This include purchasing a ready-to-move-in flat, an under-construction property, build a home on a parcel of land, or even renovate your home. Most borrowers, however, are often confused about the differences between a home loan and a home construction loan. Although the two appear to be identical, there are a number of variables that consumers should consider when selecting the correct house loan.

Home loans and home construction loans are the two main types of loan products offered by banks and non-banking financing companies to assist people achieve their property aspirations. Both of these loans provide substantial financial assistance to people looking to buy a house.

What is a home loan?

A house loan can be used to buy a ready-to-move-in property or one that is still being built by a builder. The builder is usually the one that informs borrowers about the construction deadlines and possession dates. Furthermore, most builders have relationships with banks and HFCs and can assist lenders in obtaining house loan financing. This is a property where the borrowers are not responsible for any construction or renovation work.

What is a home construction loan?

You can take out a home construction loan if you own a piece of land and want to develop a bungalow, villa, or even a multi-story building. This type of loan is usually a short-term loan that you can use to cover the costs of building a house on your plot of land. This sort of loan is only disbursed during the construction phase, and lenders examine the completion of property construction at different intervals to guarantee that the funds are only used for building.

Home loans vs home construction loan

While both housing and construction loans appear to be comparable at first glance, they have significant variances. Let’s take a look at the key differences between a house loan and a construction loan.

The application process

The first distinction between the two types of loans is the application process for a home loan in India. A standard house loan just requires the borrower to provide a few basic documents, including property documents for verification. If you want to build a house on a plot, you must submit the plot’s legal authorization paperwork, as well as the fundamental documents and property documents, to the Municipal Corporation or local authority. A blueprint or construction map of the design, as well as the property-tax application paperwork, must be provided by an architect or authorized civil engineer. As can be seen, applying for a home construction loan is a little more difficult than applying for a standard loan.

The interest rate

The interest rate should be considered when comparing home loans and construction loans. To begin, keep in mind that not all lenders provide construction loans. As a result, the few lenders who do will charge a higher home loan interest rate. A basic home loan can be obtained for interest rates ranging from 8% to 10%, however home construction loans can easily cost an extra 1.5 percent to 2%.

Loan tenure

Because home loans are high-value loans with high-amount EMIs, the loan tenure is an important factor to consider. Longer loan terms mean lower EMIs, and vice versa. Loan payback terms for ordinary home loans range from 20 to 30 years, but loan repayment terms for home building loans are typically 7 to 15 years.

Loan disbursal process

Another significant aspect to consider when comparing a home loan to a home building loan is the interest rate. Regular home loans should be disbursed into your account in seven working days or less. This loan money could alternatively be transferred directly into your builder’s account by the lender. The entire loan amount is paid out in a single installment. Home construction loans, on the other hand, are best disbursed in three to five installments, depending on how much work is finished. When lenders visit to inspect the property at regular intervals, they have the authority to suspend or delay installments if construction comes to a standstill or if they suspect the funds are not being used for building.

Types of home construction loans

A borrower can pick from three different sorts of loans. The types are listed below –

Self construction loan

A self-construction loan is available if you have purchased or currently own a land and require finances to build a home.

Plot + construction loan

If you don’t already own a plot and need money to buy it as well as build a house on it, a Plot + Construction loan is the best option. Please note that if you only need funds to purchase a plot and not to build a home, you will need to apply for a loan against property or a personal loan. Because a home construction loan will not be considered here.

Home renovation loan

If you need money to build an extra floor or add a new room to your current home, you can apply for a home extension loan. Similarly, if you want to do major repairs, renovate your house, or just give it a new look, you can get a home renovation loan.

How to get a home construction loan?

Here are the tips that will help you to get your loan approved faster

• The higher your credit score, the greater your chances of getting a loan. Your credit score represents your creditworthiness. Because it keeps track of all the loans you’ve taken/applied for so far. This also include your repayment history and payment defaults (if any). As a result, make sure you keep a spotless payment history, as each missed payment can lower your credit score.
• According to your qualifications, apply for a home construction financing. Based on your income and repayment capabilities, the lender will decide your loan eligibility. Your EMI shouldn’t be more than 50% of your monthly income. Before you apply for a house loan, determine your loan eligibility and EMI.
• Maintain a copy of your property documentation as well as your development budget. The lender will require a thorough various factors. This include grasp of the property, the house’s size, the construction resources to be used, and the name and contact information for the contractor who will be working on the project.
• When it comes to building your home, work with reputable contractors. This will increase the lender’s confidence in you, which will work to your advantage when your application is approved.
• Make sure to have some money aside for unanticipated expenses. In your quest to build your dream home, there may be some unexpected charges. Some raw materials, such as steel, cement, or sand, may see an increase in price during construction. As a result, you must prove to the bank that you have sufficient funds to cover the expense. 
• Aside from the fundamental distinctions between a home loan and a construction loan, you need also think about other factors. This include the tax benefits and the loan-to-value ratio when deciding between the two. Remember that any type of home loan is a high-risk loan. So you should weigh all of the options before deciding.