In recent years, more and more people prefer buying a piece of land rather than ready-to-move villas. There are many reasons behind this decision. The first one is that a plot is budget-friendly compared to a fully constructed house. Another reason is that it gives you the freedom to construct a house without compromising on the quality of the materials while also allowing you to meticulously plan for the interiors and exteriors.
However, like a villa or apartment, the cost involved in buying a plot is significant, and most people consider obtaining a loan for land purchase. Let’s discuss some factors that decide whether or not you will be approved for this loan.
Factors Affecting Loan For Land Purchase
1. Credit Score
Your credit score is a numerical summary of your creditworthiness based on your previous financial behaviour. Home loan lenders look at this score to decide if you are a low-risk borrower. If yes, you will be approved for favourable loan terms.
In case you have a poor credit score, try implementing the following strategies:
- Regularly inspect your credit report for any inaccuracies. If you spot errors, dispute them immediately.
- Ensure you pay all your bills and EMIs before the due date.Â
- Work on paying down ongoing loans, particularly high-interest credit cards, to lower your credit utilisation ratio.
- Limit submitting applications for new credit cards or loans, as multiple inquiries can negatively influence your score.Â
- Keep your older credit accounts open to lengthen your credit history.
2. Age
Lenders assess your age to determine your loan repayment capacity over the term. Typically, you must be at least 18 years old to officially enter into a legally binding contract for a loan. The upper age limit usually extends to 65 years, but this can vary among lenders.
The lender usually prefers the loan to be fully repaid before you reach retirement age.
This minimises the risk of default as income tends to decrease after retirement. Consequently, if you are closer to retirement, you might face stricter scrutiny and potentially shorter loan terms.
3. Occupation Type
Lenders review your job stability and income consistency to assess your loan repayment ability. If you are employed full-time, this signals financial reliability, enhancing your loan approval chances.
For self-employed individuals, lenders may require more rigorous income verification.
Your employment type influences the perceived credit risk; a steady job history suggests lower risk, potentially leading to better loan terms. Moreover, the loan amount you are eligible for often correlates with your income level, and a higher, stable income can increase the loan amount you can secure.
4. Property Type
Lenders categorise land into raw, unimproved, and improved types.
Raw land is undeveloped. It has no utilities or infrastructure, is the riskiest for lenders, and often results in stricter loan terms. Unimproved land may have some basic amenities but lacks essential services like water or electricity.
It is recommended that you should go for improved land. This land is equipped with necessary utilities and is considered the safest bet for lenders.
The loan-to-value ratio is also affected by the land type. Improved land can secure higher ratios, meaning you can borrow more against the land’s value.
5. Co-Applicant
A co-applicant has repayment obligations equal to that of the primary borrower. Your financial profile, including income, credit history, and assets, is combined with the co-applicant at the time of credit appraisal.
A co-applicant can also provide tax benefits, as you and the secondary borrower can claim deductions under applicable laws.
However, remember that if the primary borrower defaults, you must assume full repayment. Therefore, your decision to co-apply should be made after careful consideration of the financial commitment and the trust level with the primary borrower.
Conclusion
Obtaining a loan to buy land requires careful consideration of several factors. Your credit score, age, occupation type, property type, and the inclusion of a co-applicant all play crucial roles in the approval process. By understanding and addressing these factors, you can increase your chances of securing a loan for your land purchase.
