HOW MANY ACRES ARE YOU PURCHASING?
For conventional mortgages, lenders will finance a certain number of acres, a house & a garage. The number of acres that they will consider can vary based on the property location and the norm for that area. The minimum down payment can also vary based on the size and location of the land. For example, a property that is close to a major urban area and under 10 acres would most likely be approved with 20% down payment. If it is a larger acreage 30+ acres and not within an hour of a major urban area, the minimum down payment will likely increase.
For high-ratio / CMHC insured mortgages with a minimum of 5% down, they will approve and insure the value of the house, garage and the `residential component` of the land. If the norm / average acreage size for the area is 20 acres, this is what they will approve in land value. If it is 160k – then this is what they will approve. However, if you purchases a 160 acre acreage and all of the acreages surrounding it are only 20 acres – CMHC will likely only give value to the first 20 acres of land and the buyers will have to pay out of pocket for the value of the remaining land as determined by an appraisal.
It is typically easier to secure financing on CMHC insured Mortgages and it is not uncommon for lenders to require the mortgage is insured even if the buyers have a 20% down payment based on the purchase price. If it is a large acreage, has outbuildings of major value or is a mobile or modular home – these are all things that could result in either a larger down payment requirement and / or mortgage default insurance.
If there is no home on the property a mortgage is not available and one would require a land loan. Land loans typically start at a minimum of 25% down payment and go up from there based on the location, size and value of the property, they also often come at slightly higher interest rates.
WHAT ABOUT No mortgage unless there is good water! Potability reports are needed for all well water and flow rate, this will be requested either upfront with the lender approval or at the lawyers before closing. Some insurers will also request a copy of the Septic Inspection report.POTABILITY?
WHAT ABOUT ZONING? Country residential is the easiest to finance. However, if the land is zoned Agricultural, but used as residential (no farming or commercial component) the lenders and insurers will consider this as well. Agricultural & Farmland that derives income is more difficult to finance. Lenders are wary as it is difficult to foreclose on agricultural land and if the Agricultural land has a farming component or income lender options become much more limited and down payment requirements increase.
WHAT IF THE PROPERTY HAS OUT BUILDINGS? Mortgages are for a house, garage and land – and that’s all. If the property has an outbuilding of value the effective value of the property will often be reduced by the lender or insurer, and this will affect the down payment requirements.
For example, if a client is purchasing a small acreage for 800k , and there are a brand new large heated shop, horse corrals and an arena on the property that the appraiser values in total at $ 160k, this would be deducted from the purchase price in the lenders eyes bringing the effective value down to 640k (800k-160k). The buyer would then need to have a minimum 6.1% down payment based on the 640k effective value ($39k) PLUS 160k to make up the difference (value of outbuildings) for a total of $ 199,000. Even though the buyer is technically putting more than 20% down based on the contract purchase price, the lender and insurer would consider this to be financed at 94% of the value of the home, garage and land and a CMHC premium would apply.
OTHER FINANCING FACTORS TO CONSIDER: You may need to allow extra time for conditions to be removed on acreage purchases as CMHC appraisals and well water testing can cause delays.
As always with mortgage financing, the buyer plays an important role. For strong clients, the lender may make an exception to their policies.
Article was written by Corey Lewis, Jencor Mortgagee