Most people think of homes and commercial property as real estate purchases. But land in itself is an investment too. Buying a plot of land offers flexibility and profit potential. You can build your dream house, farm it out to others or sell the ground later on when the location becomes more valuable.
Financing for land is quite different from buying a house. A land loan frequently has unique conditions and terms that are not found in a conventional mortgage program. Borrowers need to understand these distinctions to make informed decisions. You need to understand the basic rules that govern land loans to make proper choices.
What is a Loan to Buy Land?
A land loan is a form of financing that helps you achieve the dream of having a piece of land to call home. Home loans can be used to borrow money for new structures, but land loans are intended specifically for purchasing the land itself. The land after purchase can be used in any way. This is not possible with a mortgage. Borrowers can buy land for several reasons–perhaps to build their own house in the future, for farming, or simply as an investment.
Financial institutions generally branch land loans into two categories- plot loans and agricultural land loans. A loan for land purchase comes with conditions according to land type and location. Since the risk of undeveloped property is often considered greater than that for developed land, lenders, naturally, have stricter terms. You need to keep this in mind when applying. This will help you avoid any surprises in the application stage.
Eligibility Criteria for Land Loans
As with any loan, the borrower must be qualified before a loan can be approved. However, the standards for land loans are often ratcheted up more than those for housing loans. Borrowers need a high credit rating, i.e., they must have repaid loans on time in the past too. The debt-to-income ratio will also be an important factor.
Lenders find underdeveloped lands riskier. Under these circumstances, borrowers will have to go a step further to show a stronger financial profile. Loan Institutions generally have a preference for investing in properties within municipal boundaries. This is because urban and semi-urban areas are seen as more stable investments. The location of the land also has an impact on loan sums granted. The lender will also want to make sure that the land can legally be used for its intended purpose, such as farming or construction. If you fail to meet these conditions, your application for a loan against real estate might meet with delays or even failure.
Interest Rates and Loan Tenure
The rate of interest on a loan to buy land is usually higher. This is because undeveloped lands also come with higher risk. Consequently, lenders are not very keen to take it as collateral. Thus, in general, applicants for land loans must bear slightly steeper interest rates.
Land loans also have a shorter duration than mortgages on houses; typically between 7 to 15 years instead of the 20-30-year term available for housing finance. With this brief reimbursement schedule, EMIs tend to go up to an extent that might exceed your monthly income.
Down Payment Requirements
To qualify for a loan to buy land, the first rule that you need to remember is that you must also make down payments. Usually, a lender will provide no more than 70% of the value of the land. That means the borrower has to cover 30% himself. In comparison with mortgages on houses, where a loan of up to 90 percent is possible, these loans need higher down payments.
As land loans are considered risky, lenders stipulate that the borrower must pay a greater proportion of the value upfront so that the risk of default is reduced. Saving enough for a substantial down payment would be the most important step because it affects the loan approval process.
Legal Due Diligence and Documentation
When you purchase land, it is very important to ensure due diligence on the legal framework. Lenders will examine the legal background of the land in every detail to avoid unexpected disputes that could arise in connection with ownership issues. This means checking land title deeds and looking into existing mortgages.
It also involves making sure that the authorities have indeed registered the land. In addition to legal clearance, different documents must also be presented by the buyer during the loan approval process. Such documents include:
- Proof of identity
- Income statements
- Sale documents
- Land registration certificate, etc.
Neglected or incomplete documents can cause delays in the approval process and may even cause rejection.
Conclusion
It is not easy to get a loan for a piece of land. Financing land is largely a matter of higher interest rates, bigger down payments, shorter loan terms, and stricter legal regulations. How much land can be financed and how small of a down payment is required depends largely on the value of the land. Maintaining one’s credit score is an excellent way to turn declines into approvals. Knowing some key rules helps pave the way to the successful handling of land loans.
