Home Loan for an Under Construction Property

Ashutosh has decided to buy an under construction property for which the builder has already paid 4 installments out of 10 linked installments. Ashutosh wants to understand the steps to avail the home loan for an under construction property along with guidelines that have to be kept in mind for the smooth & secure functioning.

Indian real estate industry have been facing the problems in near past and the developers have been facing the crunch. The developers have been thus forced to divert the money from the pre-launch projects to the almost nearly finished projects. However, now a day, more and more new investors are putting their feet forward in order to buy the new properties. Many of such people are first time investors. As the property prices are getting higher day by day, people are getting more inclined towards buying the under construction property due to advantage that they get in terms of the cost. Finance Buddha is a platform that provides you guidance in order to help them as a ready reference in the each step. Here, we have come up with steps that you can take in to the consideration.

Step 1:- Finalize the deal and take care of initial paperwork:-

In the same, the buyer and seller should negotiate and agree on the property price and payment mode. The buyer can give around 1% to 5% of amount of the property value as a token to the builder or seller. This shows the depth of seriousness of a buyer in the property. After the same, the buyer and seller can mutually agree on the balance payment that can be arranged anywhere ranging from 30 to 180 days. Other documents such as receipts of the payments, allotment letter, etc. are arranged. Once done, the No Objection Certificate (NOC) is to be applied from the developer. After the NOC letter is ready, the buyer and seller will sign the agreement to sell.

Step 2:- Approach to bank or lenders for loan:-

When all the needed documents are ready along with, “agreement to sell” and “account statement”, then the buyer can approach the bank. The buyer should be ready with all the original and photocopied documents related to the income and property documentations. Once, the bank or lender receives the documents, they check the authenticity and validity of the same. In the cases of under construction property, the buyer can choose the installments timeline till the time possession of the property is available, if anything that is paid above and over the interest is included in the principal repayment. The amount that has been paid against the property before the possession is termed as Pre-EMI and that includes only the repayment of the interest on the loan amount.

Step 3:- Buying the property:-

Once, the loan gets sanctioned, the buyer has to make a bank draft in favour of the seller. The buyer should also simultaneously get the transfer papers signed by the builder or seller and once done, the buyer can handover the bank draft to the seller. The buyer can then submit the transfer papers to the builder. The builder can carry out the verification to check the authenticity. Once done, the buyer gets the original papers transferred in his or her name. Also, such documents shall be collected by the officials of the banks as collateral.

People are more and more opting for the under construction properties because it has 15% to 20% lower cost than the prevailing rates in the locality. At the same time, the people should not ignore the fact that there is always some risk that is associated in buying such properties. Hence, there are certain points that a person should always take into the consideration while opting to purchase for under construction property.

EMI Payments should be done on the approved loan amount:-

Person should always make the EMI payments for the sanctioned loan amount as there is always a construction risk involved in the property. The principal component of the housing loan is much higher and hence it will reduce the tenure of the loan. Paying the EMIs on the sanctioned loan amount is financially viable option.

Project delay will be causing the higher liability for you:-

If the project gets delayed in any circumstances, the borrower will be having the liability in terms of paying off the dues. The loan can be settles off only when the borrower pays the principal and interest components of the loan amount that is disbursed to the builder. Thus, the reputation and track record of the developer has to be checked before opting to buy an under construction property. Also, it is advisable to the person to invest in the project that is nearly completed to reduce the involved risk. The risk is reduced when the developer has completed many projects in the given time line and when the developer is financially sound to be able to complete and deliver the project on the given time frame.

No tax Benefits given in the under construction phase:-

A borrower of the home loan can claim the tax exemption on the interest payments up to 1.15 lakh rupees and according to section 80 C, you can get tax exemptions for another 1 lakh rupees towards the principal repayment. But, at the same time, one cannot seek tax benefits in the pre-construction phase, even if you have started the repayment of your home loan. According to the section 24 of the income tax act, if a property is yet to be constructed, there will not be any kind of deduction on the payment of interests of all the years. The interest for the under construction or preconstruction period can be claimed for the deduction in the five equal installments from the year on which the construction gets completed. If the delay happens in the possession of property, then the tax benefits shall also be delayed to the similar extent.


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