Is a Land Mortgage the Same as a House Mortgage?

Do you wish to purchase a new home built from the ground up? If so, there are numerous financing options available on the market, but exploring the choices available raises several practical concerns. For example, you might wonder if a land mortgage is the same as a house mortgage? Even today, many believe that these mortgages are the same, but there are slight differences between the two which can be extremely important to investors and lenders.

This article will look at the similarities and differences between land and home mortgages. Understanding these differences will eventually help you make the best decision for your next property purchase.

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What is a land mortgage?

Land mortgages are a type of financing used to purchase a plot of land. A lender or bank will look at your credit history and land value to verify if you’re a suitable buyer.

The process of obtaining a land mortgage is similar to getting a mortgage. You’ll need a low debt-to-income ratio (DTI), strong credit, and enough money for a down payment, much like when buying a house. Banks and other financial institutions can provide this funding. Generally, there are three types of land mortgages:

  • Raw
  • Improved
  • Unimproved

Land mortgages are a versatile investment option, but can also be considered riskier for lenders because there is no home to provide as collateral. If you want to buy land, you should be prepared to spend a more significant down payment and interest rate. Also, applying for a land mortgage is more complicated than applying for a mortgage.

What is a home mortgage?

In contrast to industrial or commercial property, a home mortgage is a mortgage made by a mortgage company, bank, or other financial institution to purchase a residence—either a primary residence, a secondary residence, or investment housing.

In a house mortgage, the property owner (the borrower) transfers the ownership to the lender with the understanding that they will return the title to the borrower once the final mortgage payment is paid and all other terms of the mortgage are met.

Borrowers have the option of choosing a suitable interest rate strategy. Furthermore, you may be eligible for an income tax exemption after taking out a home mortgage. For more information about tax exemptions, you should speak with your accountant.

Similarities between land and home mortgages 

Before diving into the specifics, consider how a home mortgage and a land mortgage are similar. Both a home mortgage and a plot mortgage have comparable interest rates, eligibility requirements, and application processes, but this can vary depending on the bank from which you apply. 

The eligibility criteria are very much the same regardless of the mortgage you apply for. Similarly, interest rates and the application process will not differ significantly.

For example, the due application process is essentially the same whether you apply for a home or land mortgage. Due diligence is a study and analytical method by which a lender determines whether or not to provide money to a borrower. Your credit score, of course, will be a significant consideration during the application process. Whether it’s for a home or a plot mortgage, the lender will consider this.

Difference between land mortgage and house mortgage 

While both mortgages are used to purchase real estate, they have a few differences. It is critical to fully grasp the following aspects of a land mortgage vs. a home mortgage:

Property location

You can get a home mortgage for any location if the property is ready to move in or is under construction. However, you can get a land mortgage if the immovable asset is inside the municipality or corporation’s boundaries. Furthermore, the land should not be used for agriculture and should not be located near a village or industrial area.

Purpose

You can use a home mortgage to purchase under-construction, ready-to-move-in, resale, or self-constructed properties. A land or plot mortgage, on the other hand, is used to buy a piece of land that you will only utilize for residential reasons. You cannot use a home mortgage to purchase land on which you plan to build a house. Similarly, if you want to buy a ready-to-move-in apartment or villa, you won’t be able to get a land mortgage.

Tax deductions 

Individuals who take out a home mortgage can deduct the interest and the principal amount paid that year from their taxes. However, there appear to be no tax benefits to taking out a land mortgage. But remember, you can only take advantage of tax deductions if the mortgage is used to build a house on the land. Thus, you can only enjoy the benefits once the construction begins.

Tenure 

Mortgage tenure and EMI are essential considerations in any mortgage application. Housing mortgages have a longer term, ensuring you will not face financial stress in repaying the monthly installments. Since land purchase mortgages have a shorter repayment period, you may experience economic difficulties while repaying them. 

A home mortgage can have up to 30 years (in some instances), while a plot mortgage can have up to 15 years, though these terms vary between banks and financial organizations.

Maximum mortgage extend

In terms of home mortgages, a borrower can expect to receive a mortgage for up to 90% of the entire property value. Meanwhile, land mortgage applicants can only expect a maximum of 70% funding. 

This disparity in mortgage-to-value (LTV) comes from house mortgages linked to properties that have already been built or are being built. Land mortgages are predicated on the assumption that you will use the property in the future. Thus, the risk involved is higher.

Endnote 

A home mortgage and a land mortgage have many similarities and differences. The most crucial of these variations for a borrower is tax deductions, which boost your real income. Home mortgages also give you greater options regarding mortgage duration, mortgage amount, and interest rates. It’s critical to understand and weigh the distinctions between a home mortgage and a land mortgage before deciding.

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