Purchasing land enables you to fabricate the home you had always wanted to preserve a cut of nature. In many cases, land can be costly in the high demand areas or in big cities, so you may require fund to support your Land Purchase. However, Land purchase is also considered as an investment because of its growing worth and value. This is one of the reasons behind Indian investors being more inclined towards buying land either with the purpose of investment or for constructing a house. You may think that land purchasing is a safe venture, but the bank’s point of view is different from yours, for bank’s lending money for the land purchase is a risky business. Hence the process and approval are a bit different from a standard Home Loan.
How to Avail Land Purchase Loan
If you are planning to buy a plot or land, it may happen that you are eligible for a home loan, but not for a land purchase loan. Generally, Home loans are available only for the property which are already constructed or for the property under construction or for the properties likely to undergo construction in near future. Hence, for funding the purchase of a plot, one will have to go for a land purchase loan instead.
The cost of borrowing will totally depend on the type of property and location of the property you’re buying. Generally, the land loans have shorter tenure period as compare to other loans including Home Loan. The tenure generally varies from two to five years. But you can change the short tenure of your loan into a longer tenure by starting construction on you land within the tenure period of the land purchase loan. This generally happens in the case of construction of a residential home.
Many lenders may not be ready to lend only for the land purchase as they find this as a risky business, but most of the lenders are willing to lend you when you’ve got plans to build on your property. Holding a raw piece of land is speculative. Lending money for construction can also be risky, but banks/NBFCs are more comfortable if you add more value to the property (for example, by adding a home).
Buy and Build Together
If you go for a construction loan it is possible that you can get a loan both for the purchase of land and construction of home both in a single loan. By doing this you are adding value to your property as after construction your property will be much costly than the plot. The lenders who were not ready to lend you previously only for land will now lend you without any hassle. Another advantage to going for it together is that you have to do less paperwork and other formalities which you had to do twice. Now it can be done in one step.
In order to get your Construction loan approved along with the money of land purchase, you need to show your construction plan to the lender. This will help the lenders to rely on you and your borrowing will be easier. The money will be given to you as the construction steps proceeds.
When you take both construction loan and land purchase loan you need to pay some part of the total cost of the down payment. Generally, 20 to 30% is needed to be paid as the down payment amount. So, if you are planning to take such a loan be ready with that much amount.
NOTE– Finished lots i.e. the lot which has some utilities including streets and all are considered less risky for the lenders. So offer single-step construction loans that can be converted to “long tenure” (up to 30-year) mortgages after completion of the construction. With unfinished lots, lenders keep loan terms shorter which starts from two years to a maximum of 10 years.
How to reduce the risk of the lender to avail a land purchase loan
As discussed above Land Purchase Loans brings more risk to the lenders. As a result, most of the lenders are not ready to lend if there is no additional value attached as that of a construction in near future. But if you want to get your loan approved you need to minimise the risk of the lender, so that they can feel secure and get ready to lend you. Some points by which you can minimise the risk are-
A good credit score
Credit Score is the one which shows all your financial history. CIBIL is basically the numerical representation of your financial status which contains a track of all the credit(s) / borrowings and repayments. All the lenders consider the applicant’s CIBIL before any type of lending. To get your Land Purchase Loan approved a CIBIL of 750+ is a must to have point. A good CIBIL reduces the risk factor of the lender as it denotes you were timely to your other loans repayment.
Debt and Income Ratio
Your loan will be approved only when you will have a good debt and income ratio. Any lender wants that the borrower should be timely with their EMIs and if you have a sufficient income that means you can pay your EMIs easily on time.
Smaller Loan Amount
Going for a smaller loan amount makes it easier for you to repay the loan in small EMIs. A small loan amount implies a not too costly property and hence it can be sell again in future at a good price.
Quick Tips for Buyers
Before you go for a Land Purchase Land you should know the following things.
When you go for a Land Purchase Loan don’t only look for the interest rates and processing fee. Closing Cost is an important thing which you should know. You can have enough of money in near future to pre-close your loan but that should cost you much. Most of the banks charge some extra money for pre-closing. So, it is important to know at what cost it can be done.
Make Budget including other things too
Paying for the land is not the only thing. Money is needed for other stuff too such as for paying taxes in the municipality, Fencing cost, insurance and permit costs all should be included in your budget.
Equity Loans can help you
If you think you will not be able to qualify for the Land Purchase Loan because of any reason then use equity loans. This decreases the risk to the lender. If you are planning to go for a Land Purchase Loan then these points will surely help you.