4 Different Types of Home Loans in India

For many Indians, becoming a homeowner is a major lifelong dream, and home loans are a key enabler in achieving this dream. Home loans come in different forms offered by financial institutions depending on whether you are buying, constructing, renovating, or expanding a property. This knowledge gives borrowers the power to choose a loan option that aligns with their financial objectives and housing needs. In the article below, we describe the 4 most common types of home loans in India.

1. Home Purchase Loan

• Home Purchase Loan: These are loans commonly availed to purchase a new or resale residential property. With this loan, buyers can finance 80-90% of the value of the property, with the remaining balance being the down payment covered by the borrower.

Key Features:

• All of these properties are freehold available for sale of flats, independent houses or builder floors.
• The amount that can be borrowed depends on the borrower’s income, credit score and repayment capacity.
• The interest rates are competitive, depending on the lender and whether it is short or long-term.
• Usually, the repayment tenure is from 10 to 30 years.

Eligibility Criteria:

• The applicant must have a fixed monthly income (salaried or self-employed).
• A good credit score (typically 700 or above) also increases approval rates.
• The property must satisfy the lender’s law and technical terms.

2. Home Construction Loan

• A Home Construction Loan is beneficial for those who have land and want to construct a house on it. Unlike a home purchase loan where the money is released all at once, this loan is provided in parts as the construction progresses.

Key Characteristics:

• Credit is released in portions according to the progress of the construction.
• Borrowers are only charged interest on the amount already released, rather than the whole approved sum.
• A reasonable working construction schedule along with a Plan of Work disbursement shall be provided.
• Home purchase loan repayment will compare, but it will have additional flexibility.

Eligibility Requirements:

• Applicants must have a legally owned land ready.
• Proven reliable sources of income and good credit are a must.
• Construction must begin within a certain period after the loan is approved.

3. Home Extension Loan

• To cater for homeowners wishing to increase their current home, a Home Extension Loan allows such additions to the home, which can further include: building on new rooms, additional floors to the house, or enlarging already existing spaces.

Key Features:

• The loan amount is determined based on the estimated extension cost.
• Interest rates are usually lower compared to personal loans.
• Loan tenure can be long-term, making repayments manageable.
• Documentation requirements are relatively simple.

Eligibility Criteria:

• The applicant must legally own the property being extended.
• A good credit history and stable income improve approval chances.
• The extension plan must comply with local municipal regulations.

4. Home Renovation Loan

• Home renovation loans are best suited for people who wish to repair their home, upgrade their fittings be it interiors, paint, plumbing, or any other furnishings, and refurbish them further financially.

Key Features:

• The loan is applicable for cosmetic renovations as well as construction renovations.
• Lower interest rates compared to personal loans.
• The estimate for the renovation heavily determines the loan amount.
• Home renovation loans have shorter payback periods than home purchase loans.

Eligibility Criteria:

• Legal ownership of property by the applicant is a must.
• Possessing a reasonably good credit score alongside a steady job makes approval easier.
• Cost estimates and plans should exist to abide by the scope of the renovation.

Questions to Ask Before Choosing a Home Loan

When choosing a home loan, remember that it is interconnected to your budget and goals, so it will need considerable consideration.

1. Interest Rates & Loan Terms

check interest rates from multiple banks and housing finance companies. Both fixed and floating interest rate bases have their pros and cons regarding market fluctuations as well as individual preferences.

2. Loan Eligibility & Documentation

Familiarize yourself with the qualifying criteria given by the lender. Basic accompanying documents include proof of income, details of the property and identification documents.

3. Down Payment & Loan-to-Value (LTV) Ratio

A downpayment between 10-20% is mandatory to qualify for most home loans. The larger the down payment, the less debt the buyer has.

4. Repayment Tenure & EMI Calculation

Longer repayment periods lead to lower EMIs resulting in higher total interest expenses. Shorter repayment periods lead to greater interest but lower overall expenditure. To figure out the optimum repayment strategy for yourself, use an EMI calculator.

Conclusion

There are multiple home loan options in India depending on the different housing needs. Be it buying a new property, constructing a new house, expanding an existing home, or renovating a house, there is a tailor-made loan for each of them. Prior to applying, it is very important to analyze your financial position, evaluate the lenders, and select the home loan which is the most suitable in terms of needs and repayment abilities.

With proper planning, anyone can purchase their dream house and still maintain financial stability over an extended period.