Land loans vs home loans: Which one to choose?
Senthil Gopalakrishnan (32) wanted to buy a plot of land located near the banks of the Cauvery river at Tiruchirapalli in Tamil Nadu. Senthil is an NRI settled in Malaysia. He would often visit the place during annual visits to his hometown. Senthil hoped to return to his native place in another 10 years. Last year, he made up his mind to check out his home loan or land loan eligibility and documentation required. He approached a leading bank about buying the plot. Senthil was upset when the bank turned down his application for a Rs 50 lakh land loan. He visited the branch and met the manager as well. But the bank was firm on its decision. Land loans are not given to NRIs. But the bank manager told Senthil that he could buy the land on his own. Then the bank would be more than happy to provide him a home loan.
Lenders broadly club land loans under home loans. But there are a few differences that set the two types of loans apart. They are identical when it comes to the process and requirements. This includes the bank’s due diligence process, EMI options, documentation, need for co-applicants, rate of interest, and more. Here is a quick look at what is different:
- The end use is important here. You take a land loan to buy a plot of land for residential use. But you take a home loan to buy or build a house.
- Home loans to NRIs are an important component of the loan portfolio of lenders. But banks and non-banking finance companies (NBFCs) do not give land loans to NRIs.
- If you are looking for a big-ticket home loan, you can get one. The same will not hold true for land loans as lenders cap them. In most cases, they cannot exceed Rs 1 crore.
- Lenders calculate loan applications in terms of ‘Loan to Value’ (LTV). The LTV ratio can be as high as 90% for home loans. But it will not exceed 70% for land loans.
- The maximum home loan tenure is 30 years. If you want a land or plot loan, the tenure is 15 years.
- A home loan brings you tax benefits on the interest paid and the principal. For land loans, there are no such tax implications.
- Foreclosing a home loan does not attract penalty. This is as per the Reserve Bank of India’s rule. For foreclosure of land loans, lenders often levy penalties on borrowers.
How do I qualify for the loan?
Lenders treat land loans as home loans. So, the processing applications are similar for both. This holds whether you go to a bank or an NBFC like Bajaj Finserv. The lenders will look at your capacity to repay the loan. Various factors will matter here. These include monthly income, savings history, number of dependents in the family, and spouse’s income, if any. So, before approaching any lender, study the pre-requisites for land purchase and house construction loans.
For a land loan, borrowers need to present various documents. These include photocopies of the following documents:
- the allotment letter for the property
- approved drawings for the plot purchase
- the sale agreement or sale deed (you may need to get this from the architect or engineer)
- title deeds; if you buy a plot on resale, include documents listing the previous chain of ownership
Sometimes, the end use of the plot may change. In such cases, you have to pay conversion charges and development fees. The bank will check that nothing is outstanding. Otherwise, they may reject your application. The other set of documents is the same as in a home loan. These include:
- a completed loan application
- three passport-sized photographs
- proof of identify (photocopies of voter ID card/passport/driving licence/PAN card)
- proof of residence
- proof of business address for non-salaried individuals.
Smart tips from experts
- Due diligence for a land loan is a long process. An easier option while considering a land loan is to get a residential plot. These may already have the infrastructure you need. This includes water, sewers, and electricity. All you need to do is build your house.
- Most banks have a precondition. You must begin construction on the acquired plot of land within a certain period. A few banks offer land loans only when the owner promises construction of the house within two years from the date of allotment of the loan. NBFCs like Bajaj Finserv may have their own set of rules. So, go in for land loans only when you have a set construction target in mind.