Differences Between Land Loans And Home Loans

Introduction to Land Loans and Home Loans

A Land Loan may appear similar to a Home Loan, and they do have multiple similarities, however these two are very different loans which are aimed at buying two different types of real estate assets. Land loans are usually taken to buy a vacant piece of land, on which you may want to build a home in the future, whereas a home loan is taken to buy a property that has already been constructed or is under construction. In addition, there are several other differences such as the loan application process, product metrics and characteristics. A few of the key differences are listed below:

1. Loan to Value or LTV Ratio

LTV Ratio refers to the ratio between the loan amount and value of the underlying asset, which in this case could be the home or the plot. One can clearly see the difference in LTV ratios, for the two types of loans, stated in the table above. Lenders offer higher LTV on home loans because it will be easier for the lender to sell the ready-to-move house to quickly recoup their losses if you default. However, the likelihood of resale for vacant plots relies on a wide range of variables. In case you default on the loan after beginning some construction on the land, auctioning the partially finished property to recoup debt is tough.
 
This is about the land loan vs home loan LTV. However, even in the case of home loan vs mortgage loan LTV, you will not find much difference. A loan against property offers funds up to 75% of the property value.

2. Interest Rates

Interest rate is charged on the loan, by the lender, for lending the money to the borrower. Nowadays, only floating rates are used. In this context, home loans are slightly cheaper than land loans. The reason for this is the same as explained in the LTV section. When compared to land loans, the ease of recouping the unpaid dues gives home loans an advantage in case of default.

3. Tenure

A tenure of a loan is the total time from disbursement till the payment of the last EMI, or in other words the duration of the loan. The maximum repayment tenure for home loans with most financial institutions ranges between 20 and 30 years. However, if you apply for a land loan, the maximum repayment term drops to 15 years. Also Read: Beginner’s Guide For Taking A Loan Against Property

4. Loan Amount

This is the amount borrowed to acquire either a piece of land or an under construction or already constructed home. The home loan amount eligible to be borrowed is higher than that for the land loans.

5. Fees and Charges

Lenders bear certain costs to process loan applications, and the same is charged to buyers in the form of an application or processing fee, in addition there are a few penalty charges as well, such as late payment charge, cheque bounce charge, etc. It is highly recommended to thoroughly understand all costs involved in the process before proceeding.

6. Application Process

It is usually said that getting a home loan approval is easier than that of a land loan due to various types of requirements. The overall process of both applications, however, is more or less similar.

• The Borrower is required to fill out a detailed application form.
• While submitting the form, necessary documents need to be attached and presented to the lender for assessment.
• The form will then be reviewed and appraised and the asset for which the loan is being sought will be thoroughly examined to determine its value.
• After receiving approval, the borrower receives an offer letter with all the details such as interest rate, tenure, and other important criteria.
• Upon acceptance of the offer letter, the loan is disbursed in full or instalments, depending upon the terms and conditions agreed upon.

7. Property Types

A home loan allows to take up a loan on a fully constructed or under construction residential property. Land Loans, however, are available for:  

• Residential
• Non-agricultural
• Non-commercial
• In municipal limits/corporation limits
• Not in industrial area
• Not in a village, and more

8. Tax Benefits

A home loan makes you eligible for tax exemption on your instalments, and it includes come exemptions for both principal and interest. A land loan, however, will only offer a tax benefit if you construct a house on that particular land through a construction loan.

Also Read: Common Queries That Revolve Around Loan Against Property Misconceptions

Eligibility and Documentations

Eligibility criteria differ among lenders, however for most of them it depends upon factors such as annual income, job stability, current financial situation, etc. But the most important factor is your repayment history and credit rating, without which you cannot avail a loan. Land loans are usually granted to salaried and self-employed Indian residents above 21 years of age. 

Buying a Land/ Home is a big decision, and we hope that this guide will help you understand the differences between a land loan and a home loan. If you are searching for a loan that can be used for both house and land acquisition and is also less expensive, then look for a loan against property. The lender does not impose any restrictions on this loan’s utilisation. It means you can use the funds for whatever purpose you like, as long as it is legal. Furthermore, when applying for any of the above two loans, select a reliable NBFC or financial institution to fulfil your dream of owning an apartment or independent house.

Disclaimer: This post was first published on 16th February 2020 and has been updated for the latest information, freshness, and accuracy.