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Borrowers need to take out a land mortgage to purchase a piece of land. An individual may acquire land with the aim of developing it or incorporating a structure on it. A land mortgage is quite different from mortgages for homes and structures used for other purposes because a piece of land is not as secure an investment as other properties are. If a borrower defaults on a land loan, the lender could find it difficult to find a buyer for it. A lender may lay down several requirements for availing of a land mortgage.
An individual may purchase land to establish a structure on it to suit his purpose. A land may be available at much lower prices than occupied lots. This allows a buyer to borrow less than that for a mortgage for a ready-made structure. However, it is worthwhile to note that a lender requires a significant deposit for a land mortgage so that the borrower has a substantial equity in his land. This offers a degree of protection to the lender against possible default by the borrower.
A lender may grant a mortgage for a land with the assumption the borrower will develop the property or erect structures on it to generate an income for the owner. The borrower needs to take on the services of a property inspection firm for establishing that the land is safe for construction purposes and that the area authorities permit building on it. Additionally, the borrower has to get permits for water, electricity and sewerage connections. It is crucial to show relevant documents for these requirements at the time of loan application.
Lenders may impose additional requirements on the borrower. These include the purchase of mortgage insurance and another property as collateral against the land. The borrower needs to provide all the general requisites like copies of income receipts for the past two months, income tax returns for the last couple of years and other documents required by the lender.
You may not always be able to avail of a land mortgage for certain purchases. These include land bought for agricultural mortgages where property prices are high, as the returns on the land may not be significant. Lenders may be wary about extending loans for land used for conversion into parks and playgrounds, as well.