Differences Between a Home Loan and a Land Loan

Deborah K. Vick

Not many know that a bank offers home loans for either apartments or for purchase of land and building a house in it. But many of us have the habit of investing in land since it appreciates significantly with time. It is the Indian way to invest money more in Land and Gold than in other investment venues! So, how does one get a loan for buying just a plot of land as an investment? Land loans are the answer.

In general most of the terms and condition of the loan and the repayment modes are very much similar to that of a home loan but there does exist, a few minuscule differences which could be left out in the fine print.

Home loans can be opted only when the purchase is for a house that has been constructed, or is under construction or is guaranteed to be constructed in the near future. The third condition is the tricky one where banks offer a home loan that requires the person who gets the loan to start construction of a house in the land bought with the loan amount within a particular period of time.

Nationalized banks like the SBI offer home loans for owners who purchase a land and assure that the land will be used to construct a house in the next 2 years of purchase. Private corporate giants of the banking sector like ICICI prefer the owners to complete the construction of a house in the land bought within two years! It is up to the buyer to decide which a financially feasible option is and decide on it.

If you plan to buy the land only as an investment, then the land loan comes into play. General terms and conditions, documentation required and repayment options are the same but only that following points that are outlined have to be considered:

Type of Land

A land loan can be procured only on a residential plot. Commercially assigned layouts and agricultural lands cannot be bought using a land loan. The plot chosen should also be within corporation or municipal limits – meaning rural plots could be out of question!
LTV Value is lower

The Loan to Value is the total sum that would be covered by a loan in a purchase of property. Home loans cover 80% or more of the total cost of the property without the registration and the documentation costs taken into account. On the other hand, land loans will cover on less than 70% of the total land cost which equates to more than 30% of the cost incurred by the buyer initially.

Maximum Loan Cap

The maximum loan amount sanctioned for home loans are 60 times the monthly salary of an individual provided he has no liabilities. On a land loan the maximum amount is capped to a certain amount by banks no matter how much your salary is. This depends on the bank and could turn out to be the deal breaker for many!

A majority of the process remains the same but these limitations make buying a land for investment a slightly cumbersome approach if a loan is opted. Try to shop around different banks and get the best deal. A good history of loan repayment greatly helps your cause too!

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