6 Point Differentiation Between Home Loan Vs Home Construction Loan

All home buying and building starts with financing. Many borrowers confuse Home Loans with home construction loans because they look similar. Both loans are for buying or constructing real estate, although they differ in some ways. This article highlights those key differences between the two.

Are Home Loans Different from Home Construction Loans?

Yes, Home Loans and home construction loans are different. 

Home Loans are meant to finance purchasing of property that is ready to move in or under construction. You are not responsible for the construction in this case. 

Home construction loans are meant to finance the construction of a home or building if you already possess some land or if you want to do more construction in your house. For example, if you wish to add one more floor to your house then a home construction loan would be an apt method of financing.  

Let us understand each type of loan in detail. 

What Is A Home Loan?

A Home Loan is a type of loan that can be used to buy either a property that is already built or one that is still being built by a builder. Depending upon your lender's offerings, you can select between a fixed-rate or adjustable-rate loan.  

As the primary beneficiary of your house loan, you are eligible for tax breaks under Section 80C of the Income Tax Act. Section 24(b) of the Income Tax Act allows interest tax benefits. The Home Loan eligibility criteria are quite simple and require a few KYC and income proof documents. You can also calculate your EMI using a Home Loan EMI calculator to better plan the loan amount. 

What Is A Home Construction Loan?

A home construction loan is a financial instrument one can avail of if they wish to finance the construction of anything from a single-story bungalow or villa to an elaborate multi-unit complex. Most of the time, this kind of loan is a short-term loan, you can use the loan amount to pay for the costs of building a house on your plot of land.  

To ensure that the funds are exclusively utilized for building, lenders only disburse this form of loan during the construction phase and assess property construction at regular intervals. Your loan is secured by a mortgage on the property. A house construction loan is eligible for the same tax breaks as a Home Loan. Under Sections 80C and Section 24(b) of the Income Tax Act, you can get tax breaks on both the principal and the interest.  

Additional Read: Factors to Consider Before Applying for a Home Construction Loan 

Types Of Home Construction Loans

The following are the two primary categories of construction loans for homes: 

1. One-time closure 
2. Two-time closure 

One Time Closure

There is another name for a one-time closure loan and that is a construction-to-permanent loan. It is a single loan that covers all the different parts of your building. The money will be secured by a mortgage on the building after it is finished being constructed. When you have a good grasp on the complete estimate, one-time closure is the most appropriate type of closure to use. 

Two Time Closure

A loan with two different closings but only one approval is called a "two-time closure loan." For the actual building process, you can obtain a short-term loan with a rate that is slightly higher than average. When the house is finished being built, this construction loan is refinanced into a mortgage for a longer period on the finished property. 

6 Ways Home Loan Is Different From Home Construction Loan

Here are the 6 factors that make a Home Loan different from a home construction loan: 

Factor	Home Loan	Home Construction Loan
Purpose	Used for purchasing an already built or under construction property. The buyer is not responsible for construction	Used for construction of a house or any other building on a piece of land or further construct on an already built property.
Loan Application Process	For a standard Home Loan, you can fill out an application in person or online. The process for getting a Home Loan is easy. Just go to the lender's website or office and fill out an application form for a Home Loan. The lender will check out the property and send the loan amount directly to the builder or seller.	To get a home construction loan the process is a bit more complicated. You must first find out if a lender offers a loan for building a home and, if so, what is their qualifying criteria for such a loan. Most home construction loans are not available online because they require a lot of paperwork and documentation.
Interest Rates	Home Loan interest rates are lower because there is high competition among lenders. Moreover, government schemes like Pradhan Mantri Awas Yojana (PMAY) Scheme make owning a home easier.	Home construction loan interest rates are on the higher side because not all lenders offer home construction loans. The few who do, charge a high interest rate ranging between 10% and 14% because of low competition among lenders.
Documentation	You need to provide basic KYC, credit score and income documents to be eligible for a Home Loan.	Apart from KYC and income documents, you also need to provide documents to prove the ownership of the land on which you want to construct a building. In addition to the property-tax filing documentation, you will also need to present a blueprint or construction map of the design drawn out by an architect or licensed civil engineer.
Loan Tenor	Because Home Loans are used to buy real estate, which is expensive, Home Loans are usually high-value loans. So, the tenor for these loan is long, stretching up to 30 years.	You can get a home construction loan for a shorter amount of time than a Home Loan. Most home construction loans have tenor between 7 and 15 years.
Loan Disbursement	Once the Home Loan application is approved, the entire amount is disbursed by the lender.	A house construction loan is disbursed in installments. The loan size, loan-to-value ratio, and building progress determine the instalments. You will get the loan amount at regular intervals as your construction project moves forward. Your lender will disburse funds according to building progress. The lender will closely monitor the progress and will only release the next installment once the previous construction phase has been completed.

Consider the tax benefits and the loan-to-value ratio, in addition to the aforementioned distinctions, while deciding between a Home Loan and a construction loan.   

Final Thoughts

Evidently, a Home Loan and a home construction loan aren't the same thing and knowing the difference will help you make a sound financial decision. There are a few big differences between Home Loans and home construction loans, like the interest rate, documents required, loan application process, loan tenor, and loan disbursement process. 

To buy a completed home or one currently in the building stages from a builder, take a Home Loan. However, if you're planning on constructing your own house, you should look into a home construction loan. Before deciding on a lender, you should make sure to do a lot of research and look at a variety of lenders to see how they stack up against one another. 

Also Read: Can I Claim Home Loan Tax Benefits on an Under-Construction Property?