If you’re thinking of financing a rural property, the mortgage process varies slightly than purchasing a home in the city. While the income and credit guidelines are the same, the property requirements can be quite different. There are also additional document requirements and the lenders tend to be more selective on what and where they will finance when it comes to acreages or farms in general. This week, I want to highlight the key differences.
Water Potability Test
If the water source is well water, a requirement for an acreage property is a satisfactory water potability test. If the property is on a municipal water system this test is not required. This test done by the county or municipality will confirm the water is drinkable and doesn’t contain any harmful bacteria. If the water is discovered to have any issues, proper equipment to filter the water will have to be installed before the lender will advance the mortgage funds, or, sometimes the lender may instead be agreeable to holdback only a small portion of the total mortgage funds until confirmation has been received confirming the water is now satisfactory. Some lenders require the results of this test immediately before issuing an approval while others require it be provided to the lawyer’s office with the mortgage instructions, which would be close to the funding date. My suggestion is to get that test ordered sooner than later.
The size of the property is an important factor when sourcing a lender to provide mortgage financing for an acreage property. Majority of residential lenders will only recognize the home, garage, and up to 5 – 10 acres of land in the “lending” value. If the property is larger than that, the value of those additional acres may not be included in the mortgage loan-to-value calculation as well as any other outbuildings such as barns or shops.
In addition to the property size, the lender will confirm the zoning type. For rural residential properties, the zoning may be agricultural or county residential. Large land parcels such as farms with livestock and hobby farms may be zoned as farmland or agricultural. The 1-3 acre parcels we are seeing located in subdivisions on the outskirts of the city limits are usually zoned country residential and country residential zoning is okay with the lenders. Most residential lenders are not too fond of agriculture or farmland zoned properties as they’re not technically residential properties, so your pool of lender options is a bit smaller than if you bought in a city center. The list of options gets even smaller if you plan on using income derived from the property to qualify for the mortgage. If you’re having trouble finding a lender to finance your property, do contact ATB, a local Credit Union or Farm Credit Corporation (FCC) as they cater to farmers looking for financing.
The further away from a major city the property is, the harder it could be to find a lender. While there are still many options, they are just more critical of the other property factors such as size of the parcel of land, zoning and condition. If the property is unique in any way, the lender may request a higher downpayment, or alternatively, require the mortgage to be insured with a premium cost to you.
If you’re buying a parcel of raw land or an acreage that has a teardown property on it, the mortgage process will be quite different than if it is for a house sitting on a piece of land. The lenders who will finance land only will require a minimum of 25% downpayment depending on the location and type of property and will usually charge a higher rate than what you can get when financing both the home and the land it is sitting on.
Building on Raw Land
If you’re buying raw land with the intention of building a new home on it, you have a few more mortgage options than if you were just holding the land. There are a few ways to go about this with the first step being to buy the land and then contract a builder to construct the home. The other option is to buy the land and the new home through the builder on one contract, in which case you can usually get away with a minimum 5-10% downpayment depending on the builder’s requirements. When deciding which builder to work with do determine if they require a completion mortgage where total mortgage funds are required at completion of the build, or a draw mortgage with multiple mortgage advances required throughout the construction process. The mortgage financing for each of these types of funding can be quite different so do have a conversation with your mortgage professional to see which option will suit your finances best.
Don’t be surprised if you’re asked to provide an appraisal as one of the conditions of your mortgage approval. Your potential lender may require this document to confirm the water and sewer type, lot size, zoning, and value of the property including 5 -10 acres if applicable, among other details that will affect their financing decision.
If your dream property is an acreage, you do have many mortgage options and it’s just a matter of finding which one is going to work best for you. Obtain a mortgage pre-approval beforehand to minimize some of the stress at buying time and do be advised even if you are pre-approved, the acreage isn’t. Important to work with a mortgage professional experienced in acreage lending, and try to have your realtor push out the financing condition date as far as possible to allow for your supporting documents and property appraisal to be accepted by a lender.