Refinancing or Financing of Rural Properties – Despite 97% of America’s land area being rural, only 19.3% of the population lives there according to Census Bureau.
This can be attributed to several factors including desirable amenities in urban areas.
One major factor that, however, facilitates this phenomenon is the fact that financing or refinancing a rural property is way harder than an urban or suburban one.
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Financing of Rural Properties
Even with federal programs such as the USDA loans that are aimed at encouraging home ownership in rural areas, getting money to buy a rural home is still hard.
Truth is, it takes a lot more to buy and develop a rural space or property compared to an urban one. Why?
Absence of Standard Utilities
Most rural properties lack utilities that are considered basic such as electricity and safe drinking water.
A factor that might deter mortgage lenders.
One may encounter problems with financial institutions in cases where the rural home’s water supply is from a well, which occurs more often than not.
They may decide to completely refuse to finance the purchase or hold off a certain percentage of the agreed amount until the water is tested.
Luckily, taking a water potability test early on before approaching these rural property finance lenders should be able to help eliminate this challenge.
Once the test which is done by the municipality or county proves the well water meets the guidelines of drinking water quality, lenders will be more open to the idea of financing or refinancing the property in question.
Lenders Dislike Uncertainty
Purchasing a rural home is harder because the rural property market is not as predictable as the urban property market.
A factor that makes mortgage lenders more hesitant. Lenders dislike uncertainties.
Normally, an individual seeking a mortgage loan has to present the lender with an appraisal report.
Now, appraisal, which is a fancy term for determining the value of something, is usually based on using the values of at least 3 houses sold in the last 6 months within a mile of the subject property.
Rural areas are sparsely populated and there way fewer houses that can be used to draw the value of the property.
The uncertain estimates which may be far from the property’s true value make lenders more unlikely to grant loans since they like working with known quantities.
Zoning, Size, and Use of Property In Question
Most rural properties are zoned into two categories; country residential and agricultural.
The first features small parcels of land say 1-3 acres.
Most property lenders prefer loaning cash for residential homes.
If the size of a property features a large land, a farm, livestock, a barn, etc., one is advised to seek the loan to finance the purchase from a local bank that finances farms or an agricultural lender.
Alternatively, the extra areas which are not inclusive of the garage, home, and 5-10 acres are not made part of the mortgage loan to value calculations.
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Strict Loan Requirements When Refinancing or Financing of Rural Properties
Federal government programs that offer loans to support rural development have very strict requirements.
The United States Department of Agriculture, for example, does not issue loans.
Instead, it acts as a guarantor so one still has to find and convince the lending firm alone.
In cases where it does offer direct loans, not many can meet the set standards.
They only offer these direct loans to very low and low-income individuals whose income must be below 80% of the locality’s median salary.
If a property is far from a major city and therefore harder to get to or if the property is inaccessible due to bad roads, property lenders will most likely turn down a loan request.
Location, utilities, size, zoning, and challenges in establishing value are all factors that make it harder to get a lender to finance or refinance a rural home purchase.
This is however not to mean the venture is impossible.
Related Article: Investing In Rural Property: Challenges To Expect
All one has to do is find fair lenders available in the specific type of property they wish to buy and to take necessary precautions to ensure the loan is approved.