Some conditions usually applicable to avail a loan to buy a plot of land

A loan to buy a site is available if you want to purchase a plot of land and construct a house on it later. Usually, the bank insists that the site be purchased from a recognised authority like a development authority such as the Bangalore Development Authority, from a society or from a recognised developer.

In addition to the normal documentation, some additional documents are required to avail a land loan. These include:

• Original documents of ownership of land
• No encumbrance certificate from the registrar's office certifying that the land is not already mortgaged
• Layout drawing (approved by the city development authority) of the location where the land is, giving details of the precise location of the site and its surrounding areas
• NOC from the society for sale and transfer of land Latest revenue receipt confirming payment of land dues to the government and tax receipt for tax paid by the owner of the land

Also, most banks finance the purchase of a site only if it is in a location within the limits of the municipal corporation.

Most banks have a minimum and maximum loan amount that they lend for the purchase of a site. This differs from one bank to another. Most banks specify a limit on the loan-to-value ratio that they maintain. It could vary from 60 to 70 percent of the registered value.

The loan amount offered has no relation to the market value of the property. Any premium paid by the purchaser has to be out of your own resources. Some banks charge a higher rate of interest on loans for purchase of a site. The rate of interest on these loans may be higher by about 25-50 basis points.

The disbursement of the loan amount is always in favour of the seller of the site unless the purchaser has already paid the amount to purchase the land. Typically, the charges applicable to normal housing loans are applicable to land loans as well. Further, the age norms for a customer to be eligible for a land loan and the eligibility calculations for computing loan amount are the same as that of a regular home loan. Most banks also have a minimum income criterion. The repayment for the loan is through equated monthly instalments (EMIs) just like other home loans .However, the tenure of these loans is usually lower – up to 10 years.

The interest paid on the money borrowed for the purchase of land is not eligible for income tax deductions. However, once the borrower converts the land loan into a housing loan to finance the construction of the house, he can avail the tax benefits available under the Income Tax Act.

The security of the loan is an equitable mortgage of the site. It is done by depositing the original title deeds of the site with the lender. The lender may also insist on additional collateral security depending on the type of land.

Financing purchase of sites is a bit risky because of difficulty in documentation. Further, there is risk of security of the property. This is compounded by the fact that there may be delay in commencement of construction. One necessary requirement is that the land should be developed and clearly demarcated, and should have been approved for residential buildings