Individuals can choose to buy a home or a plot of land to construct one, as per their convenience. Each of these is a significant investment, and most buyers look for external funding to aid them in the process. This is when choosing the right financing option becomes important. Home loan and land loans, although seemingly similar, serve completely different purposes altogether. Fund-seekers must be aware of what each option entails to avail the one best suited for them.
Home loan vis-à-vis land loan
Many borrowers often confuse a loan for land for housing finance, given their similar requirements, interest rates, and processing course. Although both of them are secure funds, the primary difference lies in the pledged asset type.
Plot loans are sanctioned for the purchase of lands for house construction. These must be residential plots located within a corporation or municipal lands. Note that you cannot acquire a land loan for commercial or agricultural lands. Neither can they be availed to purchase plots in a village or industrial area.
However, buyers can avail a housing fund to finance home construction in such lands. Besides, these financial products can also be used to purchase already-built houses, and the ones under construction. Depending on the type and purpose of your property purchase, know how to choose between a land purchase loan and a home loan.
Benefits of a housing loan over a land loan
Following is a list of advantages of a housing loan over loans for land.
- Property location: Individuals can avail a home loan to purchase property at any area of their preference, notwithstanding village, municipal, agricultural or industrial area, unlike land loans.
- Tax deduction: Borrowers can enjoy tax exemptions to various extents on housing finance under Sections 24(b), 80C and 80EE of the Income Tax Act. On the other hand, land loan borrowers can only avail tax deductions if mortgaged land is utilised for home construction.
- Loan value: NBFCs allow applicants to acquire up to 90% of property value as a home construction loan, as compared to a maximum of 70% in case of loans for land.
- Repayment tenure: Financial institutions offer a comparatively longer tenure for a home loan compared to that of funds for land. With the former, borrowers can avail a repayment period up to 30 years, facilitating smaller EMI amounts and, hence, more affordable funds.
Also, home loan interest rates are charged a few bps lower than those of land loans, in spite of them seeming almost similar. These rates can be lowered further depending on an applicant’s eligibility, such as high credit score and earnings.
In this regard, it is advisable to refer to a guide to getting a better home loan interest rate before proceeding with an application.
Eligibility criteria for housing loans
Lending institutions make sure applicants qualifying for a home loan match the following eligibility parameters.
- Age: Must be between 23 and 70 years.
- Nationality: Should be of Indian residence.
- CIBIL score: Must be 750 and above.
- Employment: Applicants has to a salaried or self-employed individual.
- Monthly income: Should be according to the lender’s criteria.
- Work experience: Salaried applicants must have a minimum work experience of 3 years with the current employer.
Additionally, applicants need to submit the following documents to support their eligibility claims.
- ID proof.
- Proof of residence.
- All documents related to property ownership.
- Employee ID card or proof of business existence.
- Income proof (salary slips, or audited profit and loss balance sheet).
- Bank account details.
Potential borrowers can also check available funds against their eligibility using an online home loan calculator. Many leading financial institutions also provide pre-approved offers to ensure prompt and hassle-free disbursal of funds. These offers are available on financial products like home loans, loans against property, etc. Thus, check your pre-approved loan offer before proceeding with the application process.
One should, therefore, determine their purpose to avail the advance before applying for one. This would ensure a more streamlined process and hassle-free fund disbursal.