Building a house is one of the most appealing investments for anyone. That’s because of the unlimited levels of customisation that you get. You can literally have everything you’ve ever wanted in a dream home. But there are a lot of issues that come with buying land and building your own home. Financing is one of the biggest issues out there. So, the first step is to get a Land Purchase Loan. But before you start applying to banks, here are a few things that you should keep in mind.
Land Type
Only land that has either a commercial or residential conversion can be funded. Any land that lies within the orange and the green belt cannot be commercially funded by standard lending agencies. Ensure that the land you’ve picked out meets the required criteria.
Plot Type
The land may be in a gated community or independent. Lending institutions are ready to finance plots of land in a gated community since it’s a lot more secure. It will also have easy access to facilities like electrical cables, developed roads, earmarking, installation of sewerage and water pipes, leveling, and filling of the land and so on. See if you can find land that meets all of these criteria.
Geographical Boundaries
Lending companies are particular about location. From the perspective of risks involved for the collection team, it’s pretty significant since there’s hardly any land that’s available in the city. The collections authority is required to have infrastructure so they can recover the basic clearance needed by any lender or borrower.
Loan to Value
One of the most important factors for funding a land purchase is the Lower Loan to Value or LTV. If the land is independent, the maximum amount that can be lent is 70 percent. This can be increased to 75 percent if the land is in a gated community. This amount can only be secured when the lender has approved the developer of the land and the whole property.
Duration of Repayment
The loan tenure for Land Purchase Loan can be increased from 15 to 20 years at the most. But it should be noted that only lenders who have a number of branches can invest in Land Loans over a period of 20 years. But there are certain exceptions based on the personal credit profile of the borrower.
The Rate of Interest
When it comes to the rate of interest of a Land Purchase Loan, you’ll find that it’s similar to that of home loans. But sometimes, the interest rate on Land Loans can be slightly higher than that of home loans.
Period of Construction
When you’re taking out a Land Purchase Loan, ensure that you’re getting a loan which doesn’t have any conditions that say you’ll have to start construction over a given period of time. If you don’t have any plans of starting construction any time soon, and you’ve taken out a composite loan where your lending company funds both the purchase of the land and the construction, the rate of interest can be hiked if the construction doesn’t start by the given deadline.
Use of the Land
Most lending companies, whether they’re a bank or NBFC, want to know the use of the land when doing a credit appraisal to approve the loan. It you don’t want to construct on the loan, they’ll want to know what your reasons for buying the land are. This gives them an idea of what you plan to do with your purchase.
Risk Aspects for the Lender
Most lenders consider Land Purchase Loan to be riskier than traditional Home Loans. There’s an encroachment risk and a probability of litigation. A piece of land can’t be a priority investment of the borrower if they don’t want to build a house there. If it’s just an investment venture and the price of the land doesn’t increase as expected, the borrower might default on monthly repayments and may not bother about losing the property. These things have happened before, and that’s why lenders are so hesitant about offering Land Purchase Loans to people who aren’t interested in building a house there.
