Probe the Features and Tax Benefits of Taking a Loan for Home Renovation

  • The first thing that you should do before you apply for a home renovation loan is to get a proper estimation of the cost of renovation from a registered engineer, contractors or an architect.
  • Even if the lender sanctions the entire evaluated loan amount, actual disbursement of it will only be made after determining the level of renovation committed by the contractor.
  • Purchase of durables for the purpose of home renovation, repairs or improvement is omitted from the purview of renovation home loans.

You must look into the rate of interest as well as the tax benefits apart from your eligibility when you intend to take out a personal loan to upgrade your house from a bank or from any other sources.

  • If you are planning to renovate your home to make it look more contemporary or make it bigger you must apply for a home renovation loan; and on the other hand
  • If you want to improve the flooring, tiling, painting, and plastering of your home you can choose a personal loan for that matter.

Typically, the loan amount is disbursed in parts as renovation work progresses.

Taking out a loan for decorating your home is supposed to be more beneficial because not only you will get a large amount of money in hand quickly but you will not have to return it to your creditor all at once. You will ideally be paying your loan off in Equated Monthly Installments or EMIs.

The good thing about the home renovation loans taken out from a bank or any other financial institutions such as Libertylending.com or any other is that they will not only offer you with the money required for such projects but you can also avail the option to claim income tax deductions. This means you will save quite a lot of money in the process.

However, to enjoy this benefit, you will need to proceed in a much more strategic manner.

Estimation of cost

The first thing that you should do before you apply for a home renovation loan is to get a proper estimation of the cost of renovation from a registered engineer, contractors or an architect. This is a crucial step because all lenders will assess your loan application based on such estimates and the viability of the home renovation project.

  • The reason to get such estimation done by registered contractor or architect is that it will give the lenders an assurance that the renovation project will be finished on time.
  • This will give them confidence to give you the desired amount as a loan.

However, you must be mentally prepared to arrange for at least 10 to 20% of the loan amount you want. This is the margin money or the owner’s contribution that you will need to make to get this loan because the lender will not fund the entire 100% of the estimated cost of your home renovation project, just like any other loans.

Insist on technical verification

At all cost, technical verification is absolutely mandatory for this purpose. If you think that since the technical verification of your house is done before and therefore you will get your home renovation application sanctioned automatically by default and the amount will be readily disbursed, you should think once again.

Every money lender is always suspicious while loaning an amount and therefore they will also be skeptical about the level of renovation or improvement done or to be done in your home once the money is disbursed. Therefore, even if the lender sanctions the entire evaluated loan amount, actual disbursement of it will only be made after determining the level of renovation committed by the contractor.

Now you may ask:

  • How will the lender come to know about the extent of renovation done in your home?
  • Whether the lender will visit your house to check it out from time to time?
The reason to get such estimation done by registered contractor or architect is that it will give the lenders an assurance that the renovation project will be finished on time.

Well, the answer is, no. That is why technical verification is so important. This is actually done by the valuator empaneled with the bank. They will be evaluating the level of improvement or renovation done and will provide a technical report bi-monthly or tri-monthly. It is on this report that the banks will determine the amount of loan to be disbursed.

Things that are covered

Usually, home renovation and improvement loan will cover a few specific things. It is for this reason you should also know about the inclusions as well as the exclusions of it.

Ideally, purchase of durables for the purpose of home renovation, repairs or improvement is omitted from the purview of renovation home loans. The elements of renovation that are included in a renovation home loan are:

  • Extension of a room or the balcony
  • Flooring
  • Painting
  • Advanced plumbing and tiling
  • Changes made in the bathroom styles
  • Construction of a modular kitchen and others.

In addition to that, it is also necessary to make sure that the renovations or remodeling is done according to the existing plan of the house, and the building code. It is also mandatory that these renovation jobs are done within the built-up area of the house which is ideally the area covered by the inner and outer walls of the house along with the additional areas as mandated by the city civic authority. These additional areas include dry balcony, flowerbeds, and others. If the renovation is done beyond the permissible limits, the renovation home loan application will be summarily rejected.

The eligibility criteria

The eligibility requirement for renovation home loans, whether it is for the new or the existing home loan applicants include different things such as:

  • The Loan-to-Value or LTV ratio which may be as high as 80% which depends on whether or not you are an existing customer of the bank and have a clean track record;
  • All your strong points such as your high credit score of minimum 750, possible hike in pay, additional income from rent or other sources and others that may waive off the processing fee; and
  • An approved plan for renovation along with a proper estimation by an authorized contractor or architect.

The eligibility criteria are actually standard for all banks. Typically, the loan amount is disbursed in parts as renovation work progresses. That means you are anticipated to contribute funds to your renovation home loan amount at each level of disbursement.

Ending with tax benefits

The tax implications for renovation home loans can be complicated. Such loans taken after the completion certificate is issued may not be eligible for tax deductions. However, the interest part may be exempted as your income from house property up to a certain amount per annum.

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trudyseeger

Trudy is a Business Tech Analyst. He is very responsible towards his job. He loves to share his knowledge and experience with his friends and colleagues.

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