The Challenge of Financing Homes with Acreage
Urban living no longer cuts it and, after a hard day at work, you want to relax surrounded by the peace and privacy of rural living.
Acreage Property Can Be Desirable
The wish for a home with some acreage is a fairly common buyer request. Yet at any given time the selection for these types of properties is sparse. The biggest challenge, however, is in mortgaging the property, and the more a buyer knows before hand about financing options the better. Here’s why.
Rural Property Financing is Restrictive
In getting pre-qualified for the amount of mortgage a buyer can afford, very little if anything is explained about mortgaging a country home if that’s what the buyer wants. As well, many REALTORS® are not aware of the more restrictive guidelines lenders place on acreage properties.
Let’s use an example. Let’s say the buyers have been pre-qualified for a mortgage of $360,000 based on their income and credit history. Add their downpayment of $65,000 and they can purchase a $425,000 property. This qualification is fine for a home on a standard subdivision lot. They, however, decide to buy a country home and eventually find a 2,100 square foot home with 15 acres, a 2-car garage and a barn.
Suddenly the Rules Create a Shortfall
Excited, they take their accepted offer to the lender to have the mortgage approved but, with most lenders, rural property with acreage falls under guidelines that are more stringent than a typical house and lot, regardless of the buyers’ qualifications. Lenders will tend not to mortgage any outbuildings or acreage in excess of 2, 5 or 10 acres, depending on the lender criteria.
At this stage, this lender orders the mandatory appraisal with instructions to evaluate only the house, garage and 5 acres—no barn or the additional 10 acres. As well, the lender will only mortgage 75% of the appraised value of $360,000. This represents a mortgage of only $270,000. The purchase price of $425,000 less a mortgage of $270,000 would mean that the buyer would need to come up with the shortfall of $155,000 to close on the purchase.
Lenders Won’t Lend up to 95% Even if Insured
Though CMHC will insure up to 95% of the value, they have a list of different regions and the maximum number of acres they can include in the value. Some regions are 5 acres, some are 10. The challenge becomes finding a lender that will lend at 95% of loan to value. Even so, the buyers would still have a shortfall in the downpayment required.
This scenario happens all too often. To avoid disappointment, buyers need to be advised prior to their home search that they would need to have enough money to cover any part of a rural property that does not fit within a lender’s guidelines.