How does financing work with acreage?
My boyfriend and I would love to live on acreage but heard that banks don’t care much about the acreage. Could you explain this to me or do you know what I’m referring to?
When it comes to purchasing acreage, whether for agricultural use, recreational purposes, or building your dream home, understanding how financing works is crucial. Unlike traditional residential properties, acreage transactions involve unique considerations and financing options.
If, for example, you bought a hundred-acre property with just a home, the bank will typically appraise it only with five acres. They will say, “Hey, what is this home worth if it only had five acres?” and let’s just say it’s $200,000 less than the purchase price that you have paid. The bank will then say, “Hey, give me your deposit whatever you’re planning on paying your down payment plus this extra $200,000 which most people don’t have so then they use your backup because of financing.
Here’s a comprehensive guide to help you navigate the financing process for acreage:
1. Loan Options
When financing acreage, borrowers typically have several loan options to consider:
- Conventional Loans: Acreage purchases can be financed through conventional mortgages, with eligibility requirements varying based on property size, location, and land use, and lenders often requiring larger down payments.
- Farm Loans: USDA and FSA offer government-backed farm loans to help farmers acquire agricultural land, often with favorable terms like lower down payments and longer repayment periods.
- Land Loans: Lenders offer land loans for undeveloped acreage, with higher interest rates and shorter repayment terms compared to conventional mortgages due to the higher risk associated with raw land.
- Home Equity Loans or Lines of Credit: Home equity loans or lines of credit enable homeowners with existing residence equity to finance acreage purchases, providing a down payment or land cost cover.
2. Down Payment Requirements
Acreage loan down payment requirements vary based on loan type, lender policies, and borrower’s financial profile. Conventional lenders may require 10%-30%, while government-backed farm and land loans offer lower options, with some programs requiring as little as 5% down.
3. Property Appraisal and Valuation
Lenders evaluate acreage properties for loan approval, considering factors like location, accessibility, topography, soil quality, water access, and land use potential. The appraised value influences the lender’s loan amount and terms.
4. Zoning and Land Use Regulations
Borrowers should be aware of zoning regulations and land use restrictions that may impact their ability to obtain financing and develop the acreage. Zoning designations, like agricultural, residential, or recreational, influence loan options and property usage. Research local ordinances and consult with authorities before purchasing.
5. Due Diligence and Feasibility Studies
Before finalizing a purchase agreement for acreage, prospective buyers should conduct thorough due diligence and feasibility studies to assess the property’s suitability for their intended use. Understanding property constraints and potential challenges upfront through soil testing, environmental assessments, water rights evaluations, and consultations with land-use professionals can help borrowers make informed decisions and mitigate risks.
Acreage financing involves careful consideration of loan options, down payment requirements, property valuation, zoning regulations, and due diligence. Working with knowledgeable lenders, agents, and professionals ensures successful financing.