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What Is the Difference Between a land Loan and a Home Loan?

Many people may not notice the distinction between buying a new house and buying a plot of land, and both purchases are commonly referred to as buying property; nonetheless, there are distinctions that must be addressed when obtaining financing.

A housing loan helps you buy an under-construction or resold property, whereas a land loan helps you buy a plot of land on which you want to build a house. A house loan cannot be used to purchase a parcel of land. Similarly, a land loan cannot be obtained to purchase an unfinished or ready-to-move-in property.

Loan to Value of a Land Loan vs. a Home Loan (LTV)

The loan to value ratio refers to the amount of a loan that may be obtained against property (LTV). The LTV of a house loan is higher than that of a plot loan since it is tied to the acquisition of residential collateral. The LTV for loans under 30 lacs might be as high as 90%, but it is limited to 70% on plot loans. So, whether you want to acquire land for personal or financial objectives, you'll need to put down a minimum portion of the purchase price.

Tenure

Housing loans, as opposed to land loans, have a significantly longer loan period. The maximum period for a home loan is 30 years, but the maximum term for a land loan is 15 years.

Tax Benefits of a Land Loan vs. a Home Loan

In the event of a house loan taken out on a fully completed residential property, applicants can earn tax benefits on both the interest and principal payments; however, plot loan applicants do not qualify for tax benefits. In the case of a plot, the only tax deduction available is for the amount borrowed to construct on it.

This is by far the most important drawback for persons considering a land loan since, despite the fact that it is meant for the construction of a home, payments paid toward the repayment are not eligible for an income tax credit. However, if you commence building on the purchased plot, you will be eligible for tax breaks on that portion of the loan. A percentage of the loan used to build a house may be deducted from your taxes. The deduction is only available in the year in which the construction work is completed.

Interest Rates on a Land Loan vs. a Home Loan

Plot loans offer higher interest rates than house loans. Home loans are now accessible for around 7.50 percent per year, while plot loans are available for between 8% and 10% per year. Plot loans are riskier than home loans since banks have collateral that may be readily sold to recover losses in the case of home loans.

What Is the Difference Between a Land Loan and a Home Loan?

Home Loan

Purchase of a property that has been developed or is in the process of being built
Tax advantages are available for both principle and interest payments.
30 years or more
varies between 75% and 90%

Land Loan

Purchase of a parcel of land only for residential use
Tax breaks are only available to pay building costs.
15 years or more
varies between 70% and 80%

Conclusion

Regardless of the differences between house and land loans, the application process and loan interest rates are the same. A home loan and a plot loan both offer advantages, but the best plan is to pick one depending on your needs and ability to repay. Whether you are asking for a house loan or a plot loan, your credit score is very important.

Understanding the purpose and characteristics of a house loan and a plot loan will help you determine which one is most suited to your needs, whether you want a ready-to-move-in residential unit or one that will be built to your specifications later.