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Why is it so hard to get a mortgage on 85 acres??

Post in 'DIY and General non-hearth advice' started by mikeathens, Jan 8, 2009.

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  1. mikeathens

    mikeathens New Member

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    does anyone have any real estate experience that can explain this to me? I have 85 acres and was originally only able to get an adjustable rate mortgage - not one of those goofy subprime or interest only, but a "reasonable" adjustable rate. Loan person tells me that for property that big, they can't give a "conventional" loan. Why the hell not?

    I'm currently at 6.25%, and fixed-rate 15-year lones are at 4.5%...which I can't get for my place.

    I have not yet heard a good explanation of this crap. On the other hand, that would explain why developers gobble up huge farms and turn them in Suburbia McAmerica with 1/4 acre lots...

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  2. Dill

    Dill Feeling the Heat

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    Is it just land or do you have your primary residence there also?
    If just land banks are worried about how easy it would be to walk away from.
    If its your house banks are worried (notice a trend) that your doing something commerical. Just like insurance, 90% of people live on 2 acres or less with a cookie cutter house,so companies get used to that being the safe thing and know how to underwrite it. I would suggest finding a lender that deals with Farms, like First Pioneer Farm credit etc.
  3. mikeathens

    mikeathens New Member

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    My house is on it...I don't get the impression that it has anyhting to do with "commercial"; there was some BS about "the land being worth more than the house" blah blah blah...
  4. dumbodog00

    dumbodog00 New Member

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    Here is NE Ohio, there is a company called Farm Credit. I know they will finance land, but I don't know the terms or anything else about it. I wanted to buy 5 empty acres and would not have had a problem getting that financed through them. I do not work for them and I am not affilited with them, just some advise.
  5. smokinj

    smokinj Minister of Fire

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    morage co. will only what 6 akers on the est appraisal! dont know why? but the other akers can be done other ways.
  6. jdemaris

    jdemaris New Member

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    I'm not an expert, and things can differ by region, but have a little experience since I've bought and sold many large pieces of land over the years. I was licensed a few times in real estate sales in rural farming areas of New York.

    You can put lenders in two categories - those that are lending their own money (primary lenders) and those that are lending someone else's money. Primary lenders can make their own rules and be flexible anytime they feel like it. The secondary lenders usually cannot change anything.

    As far as large land versus small? I've never known it to make any difference when there's a house on the land. If the land is vacant and undelveloped, it's usually very hard to get a mortage unless you put up a large down-payment. Bare land is often hard to sell and has potential liabilities.

    In reference to a "reasonable adjustable rate" - seems to me that's an oxy moron. Can't see how it can be guaranteed to be reasonable and be adjustable at the same time.

    I don't know what kind of lenders you've been dealing with, nor do I know a thing about your credit history. Generally speaking, most lenders will not give a mortgage on bare land unless they are pretty damn sure, if you default, they can get their money back quickly. They will just about always judge the value of bare land by historical averages, and not price-spikes in the past few years. So, present market values may say $5000 per acre and the bank will say it's $1000 per acre when lending is involved.

    One example of what I experienced. A few years ago I got a chance to buy 20 acres with a burnt-down house in the New York Adirondacks for $20,000. At that price, it was a steal. I had no debts, owned several properties outright, and also had $50,000 cash in the bank in a CD. The bank still refused to loan me money unless I put up a $10,000 down payment (half down) if I wanted a fixed-rate, short-term mortgage for the balance. I got pissed off and didn't take the loan. Now that same piece is worth close to $100,000 (just the land).
  7. kenny chaos

    kenny chaos Minister of Fire

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    Land is not as easy to sell as propety with buildings. Talked to my realtor about selling the farm and they get 45% higher commision for selling vacant land.
    I bought this farm about 15 years ago. The bank did not want to finance vacant land. The owner subdivided off the land. The bank then gave us a loan for the entire amount but listed only on the house and five acres. We bought the other 108 acres for $1.oo. I could have defaulted on that loan, gave up the house and barns, and walked away with the 108 acres!
    That's just the way it works.
  8. RedRanger

    RedRanger New Member

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    Have you looked at joining a credit union and then later seeking a mortgage from them?

    Been a CU member all my life and have no complaints.
  9. EatenByLimestone

    EatenByLimestone Minister of Fire

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    Probably lack of comparibles. Couple that with the mortgage being hard to group into pools. It's a portfolio loan.

    Matt
  10. Nic36

    Nic36 Feeling the Heat

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    Mike,

    I went through the same thing when I bought my home. I only have 5 acres, but it is in a very good area. The lender initially told me I was "locked" for a fixed 30 year 5.5% loan. Later, the very week of closing, she called me and told me that she could not give me the loan because the land was worth more than the house. Sound familiar? Her excuse was the appraiser could only appraise it as property and not a home. I was then quoted an 8% ARM and other crazy high interest options. I went to my realtor and was able to get a 30 year fixed rate mortgage at 5.3% through another lender. Amazingly, they were able to process my loan in a week. In my case, I think it was greed. This was at a time when the rates were rock bottom and the housing market was booming. Loan abuse was rampant. They thought I was gullible enough to go along with it. Thinking back on it, I understand why so many people are in bad situations with ARMS right now.

    If I were you, I would shop around. It sounds like your home does not fit the norm for the cookie cutter loans, and they don't know how to handle it. I understand loan rules are more stringent now due to the loan abuse a few years back. The economy (so I hear every day) is down right now and I would think this would give you some leverage.

    I also bought the property next door to me about 2 years ago. It was an additional 5 acres. The best I could find was an 8% ARM that hopefully I can pay off before it adjusts. This was all because it is property and not a home. I personally think it is silly that a home mortgage has such a significant lower rate than a property purchase. I think it is more of an excuse to charge a higher rate more than anything.
  11. BucksCoBernie

    BucksCoBernie New Member

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    Weird. I would talk to a lender who deals with lending for large parcles of land. Maybe talk to a developer in your area and find out who he secured his loan with. (my guess is they were doing interest only loans back when the market was hot)
    What is the zoning classification? Is it listed strictly residential or mixed use?
    Your best bet is to deal with someone local, stay away from the internet companies if you want to close on time (if at all).

    Current rate on a 30 year fixed is 5%
    20 year fixed is 4.75%
    of course these numbers vary with credit score and other factors.

    One thing you have to remember is if you are currently paying Mortgage Insurance on the property there is a good likelihood that the PMI rate will now be double what you pay now. PMI companies are taking a beating right now and recently raised their rate.

    But yeah I would try to get a fixed loan on the property. If you have any questions feel free to PM me.
  12. kenny chaos

    kenny chaos Minister of Fire

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    BuckscoBernie- As fas as you know, is it common to get a higher commision for selling vacant land?
    Thanks-
    Ken
  13. mikeathens

    mikeathens New Member

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    Thanks, everyone. I guess I just need to keep plugging away. My current adj. rate isn't horrible...I started at 5.25% four years ago, it adjusted after the first 3 to 6.25%. Two more adjustments: one in two years (it can go up or down 2%) and one three years after that (it can go up or down 1%). It is based on 10-year treasury (bill? note?). Whatever. The bank I have it through says that he would expect my rate to come down significantly in two years (he doesn't think the current "crisis" will be over by then...I don't really want to gamble on that, though.)

    It is an "in-house" loan, because the local bank says it's not a marketable, conventional loan...but a friend of mine has 30 acres and has a fixed rate 15-year (just refinanced at 4.5%). I called the same bank and they tell me that can't give me the same deal. Huh? I have spotless credit, BTW...I'm going to contact some of the places mentioned in this thread, as well as a few other local-type banks.
  14. mayhem

    mayhem Minister of Fire

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    I bet that lots over x acres are considered farmable or something. X is probabyl between 30 and 85 acres, probably 50 or 60. This may or may nto be a state wide thing for you, so it may be of benefit to shop the loan around. You mgiht also want to find out what the limitation is thats holding you back and see about maybe splitting your lot into two loans. Maybe not an ideal, but it could put your numbers where you want to be.
  15. daveswoodhauler

    daveswoodhauler Minister of Fire

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    Probably a stupid idea...just thinking out loud.
    Any way you could re-parcel the land......say keep you home on 5 acres or so, and just split off the remianing acres under an LLC/Realty trust, etc...
    Probably not, but though I would throw it out there.
  16. jdemaris

    jdemaris New Member

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    It doesn't make a bit a difference in my area. Many homes are attached to 100, 200, sometimes over 300 acres. Only glitch is when it comes to gettting mortgages is how many deeds? Many of these older farms are made up of multiple but contiguous parcels along with separate deeds for each. In my area, if you wan't to borrow money on a house with 1/2 an acre, or 500 acres - makes no difference as long as it's on one deed. Equity is Equity. A friend of mine just got a fixed mortage on an old farm house and 250 acres - no problem.

    To the converse, a home up the road from me is on 17 acres. Ended up, the house is on two acres on one deed, then the rest on a separately deeded, but adjacent 15 acres. Bank will only finance the two acres with the house on it.
  17. SteveT

    SteveT Feeling the Heat

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    How about contacting a local mortgage broker or two? In general I don't have a whole lot of use for them but I do think that they can be a huge asset in certain situations. A good one will have lending industry contacts and can sometimes work with an underwriter to get the deal done when it isn't a "normal" situation (or at least that is what a good friend who is a mortgage broker tells me). In any event it couldn't hurt to try.
  18. SE Iowa

    SE Iowa New Member

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    I am a farmer out here in Iowa. I live on 155 acres and farm an additional 629 acres. The reason (however bad in my opinion) is sort of complicated but related to farming business. I have a operating loan, equipment loan, land loan and residential loan. The ag lenders will never lock in rates longer than 5 years for my RESIDENCE OR LAND. For equipment it is never longer than 3 years and an operating note must be renewed every year. Reasoning: Farming is a low margin highly competitive business with rapidly changing cash flows due to uncontrollable circumstances (ie weather, crop inputs, exports, ethanol, market traders etc). A mid-sized farmers' (I'm considered small) net worth, debt and cash flows can change by hundreds of thousands of dollars very rapidly and also based upon geography. For example, my net worth from the peak of July 6th to the recent low in Dec was a swing of at least $150,000. I went from the most profitable year in my life to wiping out the last 3 years worth of profits (and remember I'm a small farmer). The banks want to know how you are doing every year (and thus the yearly operating loan) and adjust the rate every year since this is the most volatile portion of our business. One could quickly loose millions (just like the big ceo's) without the bankers knowing it if they let things go longer than 12 months. Equipment is for 3 years due to the ability of bankers to look up the value of this assest easily and iron is always worth something. Now, land and residence (your situation). Land (agricultural) is somewhat volatile as well and part of your business. It is typically worth much more than your home. Your home is protected under bankruptsy laws. The banks basically will force you to bundle all loans with the same bank so that they can put leans on your residence and land against your operating notes. If you go bankrupt, they sell off your crops first, next your equipment, then your land until they are compensated. Notice that the most volatile lean is sold first down to the least, and therefore your loan rates decrease from operating down to land/residence. BUT since they force you to put all loans into one bank, they can and will not lock it in long term because they want to protect themselves against market forces. In addition, the secondary market (Fanny and Freddie) do not buy these types of loans so there is no secondary market. The local bank is at risk for the money. This is why they like to know you. In larger populated areas where there is still farmland, banks are less likey to know you and I'm guessing this only adds to the problem. Just think if our wonderful govenment would have never created Fanny and Freddie so that we all had to go local (and yes pay a little more) and be accountable to our neighbor the banker? OK I'll get off my soapbox. Long but I hope I explained why they won't lock in a rate.
  19. fabguy01

    fabguy01 New Member

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    Call these people they are good well respected and take people for what they are and not just how much $ they can make. They helped our family hold on to what our grandparents left.http://www.greenstonefcs.com/ :cheese:
  20. Nic36

    Nic36 Feeling the Heat

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    I would advise against dividing your property into multiple parcels for a few of reasons. First, you will have to pay a surveyor money to do this. Secondly, any parcels that don't have your home on will be subject to higher property taxes because it will most likely not be homestead exempt. And, as I think someone said, a mortgage will probably only apply to the property the home is on.
  21. jdemaris

    jdemaris New Member

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    The homestead exempt doesn't matter here in New York. For full-time, non-retired residents, it exempts the first $30,000 of property value. So, in most cases, it makes no difference if you have many separate parcels or not. Not many houses are assessed at less than the $30,000 cap.
    E.g. - a $60,000 house house on one acre gets the same homestead exemption as a $60,000 house on 500 acres. Makes no difference (homestead exemption called "Star" in NY).

    What IS happening though, is many people are subdividing their properties now while they can, in fear that future land-use or zoning regs will not allow it. Our town is currently trying to enact regs that prohibit land from being subdivided into anything smaller than 5 acres. Another nearby town is going for 10 acres as the smallest.

    Another thing that usually happens here is this. Let's say you've got 50 acres assessed at $100,000. Split them in half, and often the assessor will jump in and assess them for $60,000 or $70,000 each. Why? The argument is, two individual buildable properties are worth more than one, regardless of the total size. My farm is in five parcels, all contiguous though. After several hikes, I convinced the assessor to tax them all as one tax-parcel. There is no law either way, it's up to the assessor's discression.
  22. BucksCoBernie

    BucksCoBernie New Member

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    I think land usually has the same commission agreement as a residential home. Commercial commissions tends to be higher than residential. But of course it all comes down to what the owner and the agent agree to before the listing agreement is signed.
  23. Biglumber

    Biglumber Member

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    Great question. I could go on and on about our experience in procuring financing to build our home.
    I figure it has to do with usage and as a previous poster mentioned, "Comps". Get an appraisal if you don't have one and take it to some local lenders. Sounds like you are a good risk, I don't see why some bank wouldn't want your business.
    If you are zoned residential or country estate, you should be good to go.
    Keep up the faith.
  24. jdemaris

    jdemaris New Member

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    Not in rural areas I have experience with in New York and Northern Michigan. Just about always, the standard agreement is for a higher rate on bare land. I have land for sale right now in northern MI and refused to let a realtor handle it. All that I spoke with wanted 10% for land, and 7% for a home.

    A few of the reasons are -

    #1 land often has to be walked to be shown, whereas a house usually has a driveway, heat, etc. Many realtors don't want to drive a long distance and don't want to get their feet dirty or wet.

    #2 land is harder to sell since it's harder to finance. Thus, realtors often ask a higher commission since bare land often sits on the books much longer.

    #3 land often has a lower asking price than a home. A home on 1/2 acre might be $200,000, and 100 acres of land might be only $40,000.
  25. LeonMSPT

    LeonMSPT Minister of Fire

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    Your clue was "marketable mortgage"... your bank is planning to "sell" your mortgage on the secondary market. Go to a smaller, local bank, that "keeps" their mortgages in house. If you've got good credit and can repay them, they'll be happy to loan to you.
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