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16 Feb

Differences Between Land Loans And Home Loans

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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:

 

Key Differences:

 

Product Characteristics

  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.

  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.

  3. Tenure – A tenure of a loan is the total time period from disbursement till the payment of the last EMI, or in other words the duration of the loan.

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

  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.

 

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. Select a reliable NBFC or financial institution and then fulfill your dream of owning an apartment or an independent house.

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Did You Know

Deferment

Deferment refers to the time period during which a borrower is temporarily exempted from the repayment of his/her loan. This advantage is usually allowed for students who are still studying or have just graduated and are not capable enough to begin repaying. A lender can also use his discretion to provide deferment to the borrower, if the latter is going through financial difficulties.

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