The majority of individuals experience major problems when they apply for a land loan. There is no denying that one of the most complex subjects for most borrowers in the mortgage or loan segment is the land loan. Those who do not have sound knowledge can’t distinguish between land loans, housing loans, and composite loans.
Keep in mind that the aforementioned ones are three distinct types of loans. The advantages each product or loan type offers vary notably, aside from their features and terms & conditions. A lender provides home loans to qualified applicants so that they can buy or build a new home or renovate the existing residence. The sanction of a plot loan helps borrowers purchase a piece of land. Many individuals avail themselves of composite loans to construct on the same plot they buy.
Keep in mind that a licensed lender or bank will only grant your land loan application if you mention that you will invest the loan amount in a non-agricultural plot. The piece of land you wish to buy must be under local development or municipal authorities’ limit. Read on to become cognizant of some crucial facts related to a plot or land loan.
Beginning of Construction
Before approving a loan application, every land loan provider ensures that the borrower begins construction on the purchased plot within a fixed period. The main confusion between land loans and composite loans happens because of the construction of a home clause.
Unlike a land loan, the construction expense is included in the sanctioned loan amount in the plot plus construction loan. A land loan borrower can apply for a construction loan later to finish construction on the same land or plot that they purchase.
Punishment for Not Starting Construction
The majority of reputed lenders do not take the risk of approving applications for a land loan. Two vital things bother loan providers, and therefore, they take much time to sanction a land loan letter. One is that vacant plots are non-revenue generating assets, and the other is whether borrowers will pay the monthly instalments. Another concern of most land loan providers is that the purchase of a piece of land involves a great deal of risk.
Land loan borrowers may face a penalty if they don’t commence construction within the stipulated period. Your lender has the power to increase your land loan interest rate. It can do so up to 2% over your current rate of interest. Or, the loan provider may ask you to pay off the outstanding balance and close the land loan. It is imperative to keep the grace period in mind and begin construction to avoid penalties.
Land Loan Income Tax Benefits
Do not think that you will be able to reap income tax benefits on the loan you avail for purchasing a residential plot. You won’t be regarded as eligible for a home loan even if you finish construction on the plot you buy. Your lender will not consider any interest you pay prior to completing construction as pre-EMI interest similar to a home loan.
Low Land Loan Term
It is crucial for you to always remember that the monthly instalment you’ll have to pay after availing of a particular land loan amount will be more than the EMI for the same amount of home loan. The prime reason is that lenders provide land loans for a short tenure. Most loan providers determine the plot loan interest rate taking the borrower’s age, credit score, and credit history into consideration. The EMI is generally high as lenders sanction land loans for a period of five to ten years.
Loan to Value Ratio (LTV)
In the case of housing loans, the Loan to Value Ratio or LTV is 80%. However, the LTV is anywhere between 60% and 70% when it comes to plot or land loans. Most land loan providers mention that they grant 80% of the overall value of a property. In reality, the lenders fund on the basis of the market value of a property that they assess all by themselves.
Final Words
You will definitely be able to make the right move and avoid facing penalties once you are well informed of all noteworthy facts related to plot or land loans. Never forget that it’s prudent to learn from your lender before availing of a loan for purchasing a plot whether there’s a possibility of prepayment charges.
To easily avail of a land loan and have your peace of mind, it’s advisable to get in touch with a leading and reliable lender like Hero Housing Finance Ltd. HHFL doesn’t charge a higher rate of interest on land loans.
