Buying property has been one of the most secure investment plans in different economic scenarios. Besides, everyone needs the property for residential purposes. Most people opt to buy either homes or land. When you do not find a perfect ready-made residence, you can customize your home by getting the land and constructing it according to your preferences. If you lack funds, you can seek a home or land loan. There are slight differences between the two methods.
A Home Loan or a Land Loan
Home loans are applicable for ready-made homes and half-built homes. You also qualify for a home loan, if you plan to construct your home shortly. On the other hand, if you want to own land for investment or do not plan to start construction instantly, you can take a land loan. In both cases, you can get a loan from financial institutions. The application procedure, criteria, requirements, and tenure policies are almost similar in home and land loans. Most banks highly consider the credit score of the applicant. There are a few variations between home loans and land loans.
1. Location of Property And The Purpose Of Purchase The land loan is applicable for residential purposes. This category includes plots situated in residential colonies coming under municipality or corporation. You cannot apply for a land loan for commercial purposes. Thus, plots in agricultural or industrial areas are exempted from the facility. The location may include a housing society or a development authority residential scheme certified by the housing authority. Home loans, on the other hand, are an available option for built houses or partially built houses. You can start the legal procedure for a home loan after you have purchased the land and want to start construction on that piece of land. There is no particular location restriction for a home loan.
2. Loan To Cost Ratio (LCR) Loan To Value Ratio (LTV) Both ratios are interchangeability used for the total amount of loan demanded against the property value or the cost. For home loans, the ratio is around 75 to 90 percent of the property’s value or cost. For land loans, the ratio is around 75 to 80 percent of the property’s value. The rest of the 20 to 25 percent cost is what you have to get on your own as a down payment for personal or investment purposes.
3. Fixed Obligation To Income Ratio (FOI) Fixed obligation to income ratio is another entity that banks consider crucial for lending loans. It is determined based on the borrower’s net adjusted salary. For land loans, the FOI ratio is 60 percent which exceeds 90 to 95 percent for home loans. 4. Interest Rates For A Home Loan And Land Loan The interest rates that banks and other financial institutes charge are almost equal for home and land loans. Some banks find land loans a bit risky and they plan to sell the plot in case of mishandling. That’s why sometimes the land loan interest is a bit higher than that of the home loan. Moreover, the value of the plot has a greater chance of fluctuating as compared to house prices. The lenders also find plot loans riskier due to other factors such as location accessibility and infrastructure. They try to secure themselves with greater interest rates to land loans.
5. Loan Tenure The loan term differs for home and land loans. It is of longer tenure for home loans; extending for 30 years. Inland loans, the loan period extends for a maximum of 15 years. A plot loan borrower is obliged to purchase within two years of getting bank approval. 6. Tax Benefits
For a home loan, there are tax deductions on the loan amount and interest rate. This does not happen in land loans. There is again a tax deduction for building a house on the plot for the loan taken for the building. The tax benefits are applicable when the building is complete.
Final Words
There are quite a few differences between taking a loan for a home or a plot. As a borrower, one category would benefit you more for your particular needs. Thus, the borrowers must clearly understand both types before applying for any loan category.
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