Financing Land, "Farms" or Homes with Acreages

Cash Transactions are Easy ?

Yes, cash transactions can be relatively easy if you are a purchaser fortunate enough to be in that position. Sellers and agents are particularly fond of seeing cash purchasers come into the picture but a purchasers agent should also be aware of and do their due diligence with respect to the points covered here. As a cash purchaser, you will certainly have fewer headaches than are typically involved with financing either a land tract or farm type property. Nevertheless, your understanding of matters relating to potential problems that could be associated with financing for any particular property should be considered very important. Any potential problems associated with financing a particular property can certainly affect the future value of the property - should you ever wish to sell it or need to finance it. In other words, some potential problems that may be circumvented with a cash transaction may also be problems that could come back to haunt you in the future. In your interest as a purchaser, a decision to choose the sellers agent also as your purchasing representative should be made with caution in most cases. Choosing an agent experienced in the intricacies of financing land and farms as your representative could prove to be a very wise decision even if planning to purchase with cash.

Top of Page Next

Financing for Homes with Acreages - Generally

Site size and relative value characteristics can present the trickiest questions with respect to financing residential acreage properties. Common mortgage financing channels for the secondary mortgage market (Fannie Mae) may or may not be available for any particular home with acreage property. Fannie Mae type loans generally carry the most favorable interest rates, so whether or not a particular property can be financed through those channels can certainly have a bearing on monthly payment amounts and overall financing costs. Throughout the mortgage industry, there is much misconception about what will or will not qualify for FNMA (Fannie Mae) guidelines, so that can also become a factor. Misconceptions with respect to site sizes or acreages are that FNMA guidelines dictacte a site of no more than 5 acres or no more than 10 acres, etc. In fact, there is no such FNMA guideline with respect to a specific limit on site size. FNMA is more specific about the ratio, or percentage, of site value to overall property value which can generally be up to the range of 25%-30% without problems in most cases. However, often counter to the actual FNMA guidelines, suburban properties or waterfront properties with smaller sites and much higher site value percentages are generally shuffled through the FNMA lending underwriting process with no problem, whereas a property with acreage may encounter underwriting problems even if with a site value percentage range well within the actual FNMA guidelines. Unfortunately, the misconceptions and incorrect application of actual guidelines in the mortgage industry exists and are a significant factor for gaining approval for financing residential properties with acreage. If the site size is no more than 10 acres and the estimated ratio (percentage) of site value to total property value is no more than 25%, there should be no problems with obtaining FNMA financing approval due to site size. Still, individual lenders may have specific limits on acceptable site sizes. This is something best ascertained prior to engaging any lender for potential financing, but beware of the typical mortgage personnel who have little understanding of these factors or have the common misconceptions about it all. How do you ascertain what the reasonable ball park breakdowns for site value versus overall property value will be in an appraisal? An agent experienced with these type properties and the appraisal process may be capable of arriving at a credible estimate for these important figures. An agent with appraisal experience in these type properties can certainly come up with credible estimates for these ratios as will be dealt with in the loan approval process. An additional and accompanying benefit of research into a credible value percentage attributable to the site is determining estimated market value of the property relative to the asking or listing price. One final note with respect to FNMA financing is that "agricultural" properties are not acceptable for securitization in lending. That guideline is irrespective of acreage. This doesn't mean that you can't have horses, cows or animals but relates more to the property being agriculturally income oriented. Terminology, though largely irrelevant, should be used carefully with respect to financing properties. In the Southeast, the term "farm" is often very loosely used to describe anything from a fenced 10 acre pasture to a larger acreage residential property that has no semblance of present or past actual "farming" activity. For most residential acreage properties "estate property" probably serves as a better description.

Previous Top of Page Next

Residential Homes with Acreages Financing other than Fannie Mae

If your Home with Acreage property isn't a good prospect for FNMA financing, choosing an appropriate mortgage origination person is critically important in getting financing. The typical mortgage brokeragage office solution to a larger sized site in a home with acreage property is to split the property into two different loans and two different lenders which can usually work but won't come without complications, additional relative costs and a likely higher monthly sum of two separate payments. An example of what you end up with in the above scenario might be 1) a 30 year loan on the home with 5 or 10 acres and then 2) a separate loan on the remainder of the acreage for a shorter payoff period requirement and a higher interest rate. In this preceding scenario, the two loans are also likely to have significantly different down payment requirements and possibly a higher overall down payment than might be found with a different financing option. Another viable option might be to get a bank to finance the whole property "in house", but banks generally only want to carry such loans for 5-10 years, so your payment would be very high relative to a 30 year note. To accomodate you with a lower monthly payment, banks sometimes make the loans for a 5-10 year term but with monthly payment amounts more similar to 30 year note payments and then balloon the loan at the end of the 5-10 year period, at which point pay-off or refinancing would be required. There are additional options available for residential properties with higher acreages or higher land value to total value ratios that can be 30 year loans with slightly higher but reasonable interest rates relative to FNMA financing. FHA financing is also a possibility for these properties due to no direct limits on site sizes. However, FHA has limits on loan amounts which are too low for many residential acreage properties. FHA loans are becoming more viable in many transactions and limits are being raised continuously. If the transaction amount is within FHA loan limits, FHA may be a good option that allows for 30 year payoff, lower monthly payments and lower down payment options. Other loan options are also available for lower percentage down payments and 30 year pay offs for higher valued residential acreage properties. Expertise, or even knowledge of the existense of these type loan programs will not likely be found at the familiar mortgage brokerage offices or even with most bank loan officers. An agent with experience dealing with higher acreage and higher valued residential properties should be able to assist with obtaining more favorable financing than some of the options noted here or that you will probably encounter with most any residential mortgage loan specialist.

Previous Top of Page Next

Financing Land

Financing for land is generally much more restrictive with respect to loan pay off periods, which generally don't exceed 10 years. Lower percentage down payments are also not generally an option for bank financed land and down payment requirements can range anywhere from 20% to 55% of property value. This is a point some first time prospective land purchasers do not realize, thinking that financing land is the same as residential financing. Low down payment land purchases are most often restricted to owner financed smaller land tracts which can be in the form of a "land contract" or an actual deed transfer with mortgage. Entering into "land contracts" should be made with caution if not with a known reputable land dealer. Otherwise, typical land financing is generally not highly complicated but can require higher relative financial strength than might be expected for conventional residential mortgage lending. Land only lending is generally perceived by lenders to be more risky than home lending.

Previous Top of Page Next

Getting Pre-Approved for Financing can be Very Beneficial

When looking to buy, various scenarios could be your case. If you are selling an existing residential property and planning to buy another, you probably have a good idea of what your price range is, if not moving into a higher price range. Still, even in this previous case,and certainly in most any other case, getting pre-approval for financing is a very good move. Pre-approval will make it clear how much you can afford, allow you to focus on properties that you have a realistic chance of buying, streamline the whole process of purchasing and potentially save a great deal of time as well as possible dissappointment. Going through the pre-approval process should have many benefits including potential bargaining power with respect to purchase price, bargaining power with respect to projected ability of closing quickly and general overall increased credibility in the whole process from inital engagement of an agent through closing the deal. In arranging for financing pre-approval, the characteristics of the type property you are planning to purchase should be made very clear in order to avoid wasted time by later learning that the approving lender will not be able to provide financing for the property you choose due to size of acreage, site value ratio or some of the other potential problems noted in the sections above.

Previous Top of Page Next

It's Certainly all Worth It !

All the noted potential pitfalls and headaches with financing land or residential acreage properties are certainly not intended to be discouraging but rather as a "heads up" to assist in better understanding financing for these type properties. If you love land and what it has to offer as much as me, all trials and tribulations that might be involved with purchasing the place of your dreams will be well worth it. I would like to earn the opportunity to assist you in realizing those dreams.

Kenny Brothers

Realize Your Dream...