Buying a plot provides you with the freedom to construct a house based on the design you have dreamt of. Moreover, if you buy a plot on the outskirts with good growth potential, then at the time of construction, say after 3-4 years, you will find that the plot, plus construction cost, is much, much lower than what it would have cost you if you had purchased a ready-to-move villa in the future.
If you are planning to buy a plot in recent years but are worried about loan approval, consider avoiding the following pitfalls associated with plot purchase loan approval.
Common Plot Purchase Loan Mistakes
1. Multiple Applications
Sometimes, to get the best deal on the plot purchase, you submit loan applications to multiple lenders. You do this to receive immediate funding into your account. However, it is recommended to wait until one lender responds to your funding request. If your application is denied, you should ask the lender to provide you with detailed reasons for the denial.
Work on improving the negatives on your credit profile first before proceeding with a fresh application. Remember, the lender requests your credit report from CIBIL whenever you request funding. This process is called a hard inquiry. Too many hard inquiries in a short span make you appear as a credit-hungry borrower and lower your credit score.
Make sure you furnish all home loan documents to lower the rejection chances.
2. Disputed Plot
Never show interest in purchasing a disputed plot. Even if you somehow get approved for a loan by concealing some facts, in later years, when the lender or the party involved in the land ownership finds out, they will take legal action against you.
3. Property Location
The location of the plot matters a lot. A plot in an area where both luxury and necessary amenities are easily available fetches better resale value. This ensures the lender can easily auction the plot to recover their dues if you default on your future borrowings.
It is important to mention that in a plot loan, the piece of land for which you are applying for funds serves as collateral. The lender has conditional ownership. That means you are free to use the land as you wish, but in the event of default, the lender has the right to sell or keep the property.
4. Not Maintaining DTI
DTI stands for debt-to-income ratio. It represents the portion of monthly earnings used for debt repayment. Lenders typically prefer a DTI of less than 50.
If your DTI is high, it is best to pay off a few debts first, either through savings or debt consolidation.
5. Avoid Higher Credit Utilisation
A credit utilisation ratio refers to the amount of credit you are using compared to your available credit limit. A high credit utilisation ratio can indicate to lending institutions that you are overly reliant on credit. This may raise concerns about your ability to manage new debt.
Aim to maintain a credit utilisation ratio below 30% to keep your loan approval chances high.
6. Avoid Frequent Job Switches
Lenders review your employment history to assess your financial stability. According to them, frequent job switches can be a red flag. They signal potential instability and financial stress.
Lenders prefer a steady income stream, which a stable job indicates. If you have changed jobs often, especially within short periods, lenders might question your ability to meet long-term financial commitments.
They typically favour applicants who have been in their current job for at least a year.
7. Not Adding a Co-Applicant
When you apply for a loan without a co-applicant, lenders see only your income and credit history. If your income isn’t high enough or your credit score is low, the lender may doubt your ability to repay the loan.
A co-applicant could provide additional security for the lender by combining income. Adding a co-applicant often means a better chance of approval, as it reassures the lender that the loan obligations will be met, even if you face financial difficulties.
Conclusion
When applying for a loan for a plot purchase, it’s crucial to avoid certain pitfalls. Firstly, refrain from submitting multiple loan applications simultaneously, as this can harm your credit score. Secondly, never consider purchasing a disputed plot, as it can lead to legal issues in the near term. Thirdly, pay close attention to the location of the plot, aiming for areas with both luxury and necessary amenities for better resale value. Additionally, ensure you maintain a healthy debt-to-income ratio and keep your credit utilisation below 30% to increase your chances of loan approval.
