How Land Loan and Home Loan differ

  1. Introduction to Land Loan and Home Loan

A lot of us get confused with between types of loans – land and home, because, well they mean the same thing. But when it comes to loans, specifically, the two are quite distinct in nature. Whilst they could be availed for a similar purpose – to have a property – the application process and the prerequisites are somewhat different from each other.

A land loan is applicable to a piece of land on which you may want to build a home in the future, whereas a home loan is on a constructed building or one that is under construction. So, that is the basic dissimilarity between the two, but there are a lot of other differentiating factors as well. Let us have a look at them.

  1. Some of the key differentiators between the two are:


 

Product Characteristics

a. Loan to Value or LTV Ratio – LTV Ratio refers to loan amount to the value of the asset being acquired, 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.

b. Interest Rates – Interest rate is charged on the loan, by the lender, for lending the money to the borrower. Both floating and fixed interest rates are used by the lenders.

c. Tenure – A tenure of a loan is the total period between the disbursement of the first loan instalment till the complete repayment of the loan. It varies for both types of loans.

d. Loan Amount – This is the amount borrowed, in order to acquire either a piece of land or an under construction/already constructed home.

e. Fee and Charges – Lenders bear a certain cost to process a loan for the same various types of fees or charges while processing a loan, such as application fee, processing fee, registration fee, documentation fee, notary fee, legal fee, late payment charges, prepayment charges and many more are charged to the borrower. It is always recommended to thoroughly understand all costs involved in the process before plunging in.

f. 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, which one has to abide by to fulfil.
  • Then signing the agreement will take place which means sealing the final deal.
  • The loan will be disbursed in instalments.

g. Property Types – A home loan allows to take up a loan on a fully constructed or under construction residential property, as already discussed; but when it comes to land loans, there are various types of land on which you may seek a loan.

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

h. Tax Benefits – A home loan makes you eligible for tax exemption on your instalments, consisting of both interest and principal under Section 24(b) and Section 80C of the Income Tax Act, respectively. A land loan, however, will only offer a tax benefit if you construct a house on that particular land through a construction loan.

  1. Eligibility and Documentations

    Eligibility criteria differ with lenders 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. This is scrutinized by examining your salary slips, monthly savings, dependents in the family etc. Land loans are 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 to know the differences between a land loan and a home loan. Select the perfect financial institution that will provide you with the required finance and flexibility without burdening your existing financial commitments.