Hobby Farm Financing- What’s the Beef?
As a horse person myself, I totally get it. One day, I’d love to wake up and look out the window to green pastures and no neighbors in sight, and I love to help my clients purchase the farm of their dreams, whether it’s their primary residence or a second home, or even as an investment. When I started in this business, I was surprised to find out that “farm” is a dirty word in mortgage banking, and approving financing on one can be quite the challenge.
“Look, Grace, if they don’t pay, what are we going to do? Foreclose on the family farm and then wait around for years for someone else who wants the place? No thanks. Too much risk.”
That’s more or less the call I got when I brought my first farm property into underwriting- standard residential mortgages are designed for a residence, and the requirements for those loan types are clear that they are for a home, not a business. Commercial mortgages exist, but typically with higher down payments, shorter terms, and renewal requirements to account for the higher risk. Ideally, the borrower for a residential mortgage has employment that has nothing to do with the subject property, and the property has no structures or features that limit the number of interested buyers in the event that the investor had to resell it after a foreclosure.
So what happens when you want a house with some land for horses or other livestock, or some land that you’d like to put into production? Maybe you do plan to run your business from the property, but the value is mostly in the home and not a fit for a commercial mortgage? That’s where I come in with dozens of investors to help you find the best match. Here are the top tips I have for someone who dreams of living where the green grass grows (name that tune!)
It’s gotta have a house: I love that most of my farm clients are so passionate about their dreams that they’d happily sleep in a camper or build out a semi-legal apartment in a quonset hut, but unless you have a large down payment and tax returns showing a profitable business for commercial lending, a residential mortage requires a residence. The nicer the residence, the better your terms. Switch up your search from the best barn with a house you can fix up to the best house with a barn you can fix up, and your loan terms will improve immensely.
Mo’ acreage mo’ problems: I would venture to say most investors have a maximum amount of acreage they will lend on. Those that don’t will still want to support the value of the property with similar property sales on appraisal, and large properties are a challenge there. Lenders generally want less than 35% of the property value to be from the land, so the beautiful 200 acres with a little hunting cabin will be considered high risk and your loan will reflect that. Don’t shoot the messenger, Do consider whether you can split multiple parcels into separate transactions with smaller lot sizes.
How are you going to pay for it? The biggest mistake I see other lenders make when they come to me for help with farm properties is including any suggestion in the loan file that the borrower is going to be making an income from farming. Working farms where the farming income is required to repay the loan are subject to different regulations and ineligible for a residential loan, and many underwriters interpret this as “a property that generates a single cent of income” - that’s not true, of course, but your lender should ensure that your loan application highlights that you have steady income to make the mortgage payment.
You’re going to need some money: I hate to be the bearer of bad news on the topic, but those 0 down loan programs are not for your dream property, at least the vast majority of the time. If you are looking for 0 down payment on a hobby farm, that likely will mean selecting a property that is mostly residential in nature and building out your farm as you go. Space to expand and a couple outbuildings to finish out are going to be your best bet versus something with 20 stalls and an arena.
Hopefully I haven’t been Lender Grace, crusher of dreams, and you are still interested. The right lender partner can do a lot to help you find the right property and structure your loan application to put your best foot forward and help the lender understand that it is no more risk than the subdivision up the road.
