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Understanding Home Construction Loan

Housing Finance Know More 19-09-2022 | 5 mins read

In contrast to buying an already constructed home, you may want to build a home according to your own needs. However, to construct a home, you would require enough capital to meet the financial requirements of the different aspects of building a home such as buying a plot, paying the labor, and others. A home construction loan help you get the money you need to build your home. In this article, you can understand the entire process of a home construction loan.

What is a Home Construction Loan?

A home construction loan is simply a short-term home loan that can help you financially provide for the entire construction process of your home. Usually, home construction loans are offered for a lesser tenure compared to other loans. With this loan, you can cover the costs of the land, building material required, contractor labor, permits needed for home construction, and many more. More often, home construction loans include a particular contingency reserve that can be used to cover unexpected costs that may come up during the construction process.

How Do Home Construction Loans Work?

If you are planning to build a home, you may already have decided on a particular plot of land or a neighborhood to build your home. The bank or lending institution considers factors such as the neighborhood of the plot and others while sanctioning the loan. Let us have a look at the home construction loan process.

Most construction loans cover the costs of buying a piece of land as well as constructing a home on that piece of land. Depending on your financial needs, it is best to check these terms with the lender before going ahead with the loan process. By covering both the costs of the land and construction, lenders tend to have more involvement in home construction loans compared to standard home loans.

Once you’ve secured the loan, the lender will pay the builder in regular intervals depending on the phase of the construction. The lender first checks the progress of the construction and then releases funds accordingly. Before the construction is completed, you will only have to make interest payments. After completion of the house, you should start repaying the borrowed loan capital amount in EMIs.

Types of Home Loans

There are 5 main types of home loans.

1. Construction-Only Loan

This loan only provides funds that are needed to complete the construction of the house. The borrower is responsible to repay the entire loan during maturity or get a mortgage to secure permanent financing.

2. Construction-To-Permanent Loan

These loans allow you to borrow money to pay for the cost of constructing your home. The overall fees would be reduced as you have only one set of costs to pay.

3. Renovation Loan

You can take out a renovation loan if you have been planning to upgrade your existing home rather than building a new one.

4. Owner-Builder Construction Loan

These loans are either construction-only loans or construction-to-permanent loans wherein you also act in the capacity of a home builder.

5. End Loan

Here are some tips for house construction that can come in handy.

  • Select the builder carefully
  • Investigate the area in which you want to build your home
  • Hire a lawyer
  • Don’t overbuild
  • Don’t select a builder based just on their bid
  • Decide the neighborhood carefully
  • Note down your requirements before approaching the builder

In a Nutshell

A home construction loan can help you build the home of your dreams. You can pick any type of home construction loan depending on your needs. If you are looking to avail of home construction, Piramal Capital Housing and Finance can help you with one while offering benefits such as quick loan sanctions.

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