Differences between a mortgage loan and a real estate loan

Not many know that a bank offers mortgage loans for apartments or to buy land and build a house on it. But many of us are in the habit of investing in land as it appreciates significantly over time. It is the Indian way to invest more money in land and gold than in other investment places! So how do you get a loan to buy just a piece of land as an investment? Land loans are the answer.

In general, most of the loan terms and conditions and payment methods are very similar to those of a home loan, but there are some small differences that could be overlooked in the fine print.

Home loans are available only when the purchase is for a home that has been built, is under construction, or is guaranteed to be built in the near future. The third condition is a tricky one where banks offer a home loan that requires the person getting the loan to start building a house on the land purchased with the loan amount within a set period of time.

Nationalized banks like the SBI offer mortgage loans to homeowners who buy land and ensure that the land will be used to build a house within the next 2 years of purchase. Private corporate giants in the banking sector like ICICI prefer homeowners to complete construction of a house on the purchased land within two years! It is up to the buyer to decide what is a financially viable option and decide on it.

If you plan to buy the land only as an investment, then the land loan comes into play. The general terms and conditions, the required documentation and the payment options are the same, but only the following points that are described should be considered:

Land Type

A land loan can only be obtained on a residential parcel. Commercially assigned layouts and agricultural land cannot be purchased through a land loan. The parcel chosen must also be within the boundaries of the corporation or municipality, which means that rural parcels could be out of the question.

The LTV value is lower

The Loan to Value is the total amount that a loan would cover in the purchase of a property. Mortgage loans cover 80% or more of the total cost of ownership without regard to registration and documentation costs. On the other hand, land loans will cover less than 70% of the total cost of the land, which is equivalent to more than 30% of the cost incurred by the buyer initially.

Maximum loan limit

The maximum loan amount sanctioned for home loans is 60 times an individual’s monthly salary as long as they have no liabilities. On a land loan, the maximum amount is limited to a certain amount by the banks, no matter how much your salary is. This depends on the bank and could become the deciding factor for many!

Most of the process remains the same, but these limitations make buying investment land a bit of a cumbersome approach if you opt for a loan. Try to shop around different banks and get the best deal. A good loan repayment history goes a long way in helping your cause, too!