A land loan is a financial instrument provided by a bank to a borrower for the purchase of a plot or land. In India, the land has always been a way to invest and there are a number of banks that provide loans for the purchase of such property.
A Land loan typically requires a larger down payment than traditional mortgages as much as 20% – 30% of the asking price.
How are land loans different from Home loans?
The terms, rates, and processes are similar for both the loans, but there are some intrinsic differences between the two.
Home loans are available on all properties irrespective of their location or type, while you may get a land loan only for a residential plot and only if it’s located within the municipal or corporation limits. You cannot obtain any funding for agricultural land, or for buying a land in a village. While you can get up to 80-85% funding in a home loan, land loans are restricted up to 70% of the plot value at best, so you have to shell out rest of the funds on your own. Most importantly home loans provide a tax benefit, but in the case of just a land loan for investment, it’s not possible.
What are the 3 things you must know before opting for a land loan?
1) Land Fundamentals
It is very important to be clear on what the potential purchase entails. Get the boundaries marked by the surveyors and everything should be on paper to show as proof to the lenders. And always cross check the zoning and land use restrictions. If it’s a residential land, then its very essential to have access to utilities like water sewer, electricity, etc and also access to a public road. Other than that you can check with the local planning department about future plans in the immediate neighborhood, whether it will be beneficial or act as a disadvantage to you.
2) Use of Land
The terms of a loan are decided typically on the intended use of the land, because it’s directly linked to bank’s risk exposure, which makes getting land loans trickier than buying an existing house, if there is a well chalked out plan for the construction of a house or use of the land, the bank still accepts the calendar as manageable. But if there is raw land with no specific plans to build anything, it’s basically a speculative investment. So it’s important to know the purpose or what could be the benefits that can be yielded from the purchase of land in the future to actually be successful in getting the loan
3) Loan Options
Last but not the least, you should know about the seller financing which can be a good option for getting favorable terms, if the seller is eager to unload the land and the market is running cool. Everything can be negotiable from the down payment to the interest rate. Don’t forget to get the papers reviewed by a legal counsel before signing to avoid any loopholes and unpleasant surprises. Local banks may offer better terms for land, due to their knowledge of the property, but the buyer has to show plans and personal finance information to show creditworthiness.