Mortgage Financing for Acreages

"Provided you are not planning to grow crops or raise animals for sale, financing a home in the country is quite similar to financing an urban home"

On this article page, we discuss financing a rural acreage property.

The General Thought...

For some, living in the country has extreme appeal. Peace and quiet, your own space, no nosy neighbors, beautiful setting, big home, a place to relax, raise the kids ... the list goes on.  If you are considering acreage living, there's lots to read to make sure this lifestyle is a fit for you.

Provided you are not planning to grow crops or raise animals for sale, financing a home in the country is quite similar to financing an urban home, with a few differences regarding the property itself. In this article, we will talk about and reference:

  • Acreage vs Farm
  • Down payment requirements
  • Location
  • Municipal zoning
  • Water and septic considerations
  • Outbuildings
  • Intended use of the property
  • Appraisal requirements

Lending Considerations

Lending money is always about managing risk for the lender, risk that you'll pay them back as agreed and they don't have to seize the asset instead.  As it relates to mortgage lending, lenders don't really want to foreclose a property because it takes time and effort to get the homeowner off the property, list it for sale, then actually get it sold where they can finally get (some of) their money back.  With rural properties, depending on remoteness of location and condition of the property, time on the market to sell could take years vs. a quick sale for a home in an urban area where there is much more demand. Mortgage lenders don't like waiting years to get their money back on a non-performing loan, so they have special rules as it relates to rural properties to reduce their risk. (I tell it like it is!)

Acreage vs Farm Mortgages

Sometimes the distinction between a farm and an acreage property is blurry.  Generally for residential lending, the acreage needs to be 10 acres or less, and the intended use of the property is residential (not a farming operation nor source of the applicant's income). Here's why: if the homeowner does derive their income from "farm land" it takes 12 months BEFORE the lender can start foreclosing on a delinquent borrower - that's a long time! Foreclosure law requires much less for residential lending, typically 3 months. So if you want to farm, you need to get a farm loan with a much bigger down payment, not a residential house loan as we are discussing on this page.

Municipal zoning refers to what you are allowed to do with your land. If the property is zoned 'Country Residential' by the local municipality, that means residential not agri-business or commercial use, so this zoning designation makes it easy for the lender to say approved (farming not allowed). If the zoning is "Agriculture", then lending gets tougher as farming would be a 'permitted use' for the land by the municipality. So residential mortgage lending rules restrict the financable size/value of an acreage zoned Agriculture (AG-Zoning), which serves to make it tough for the homeowner to earn a living wage off the land or at least forces the buyer to bring more down payment to the purchase as security for repayment.

Down Payment for an Acreage

Whereas farm loans typically require 25% down payment or more, an acreage under $1 mil. can be bought with as little as 5% down payment under a residential CMHC-insured lending program provided the property meets the residential lending rules:

  • The property must have a house in good condition (called 'remaining economic life')
  • Lending and your down payment are based, not on the purchase price but, on "residential lending value" which means value of the house, garage and ~10 acres, as determined in a property appraisal, which is a requirement.
  • The appraiser is instructed by the mortgage lender to value only the house, one garage and ~10 acres and to give ZERO value to outbuildings (shops, barns, corals, additional garages, or any other buildings like a second house or quonset), and the excess acreage.
  • If the purchase price exceeds the residential lending value, you must pay the difference from your own pocket, in addition to your minimum down payment. If it is the same value or less, then only 5% down is possible.
  • Example: purchase price agreed to between buyer and seller is $475K for 15 acres with house, garage, guest house, barn and riding arena.  Appraiser's report suggests lending value on just 10 acres, house and garage at $460K.  Buyer's minimum down payment, is 5% of $460K ($23K) plus $15K difference in purchase price to lending value, so $38K in total.
  • Note, acreages in very remote locations may be harder to finance with a smaller down payment, because of effort it takes to sell.
  • Acreages in excess of $1mil will need a down payment of at least 20%, more likely 25%.

Water & Septic

In order to live in house, you need to be able to drink the water and flush the toilet.  That's a no-brainer in the city where all the homes are connected to a municipal water and sewer system. In the country, generally you need to take care of these yourself.  

When buying, knowing that the well produces potable water and the septic system is installed correctly and working are huge, as they can be very expensive to fix.  E. coli is nasty bacteria from animal feces. If bacteria gets into the ground water and then seeps into the well bore, that's a problem. A new well might cost $8K to $10K to drill for example. And I have heard of acreage owners replacing faulty septic fields in the $60K to $100K range, 3-flushes into ownership of their new home. Don't go there!

Back to lender risk - lenders don't want your problems to become their problems, so they insist on more paperwork before an approval. You will require:

  • Water Potability Certificate no older than 60 days, confirming that the water quality is fit for human consumption. Normally, your* Realtor should take a sample to the regional health board on behalf of the seller for sampling. (*to prevent tampering with the water sample)
  • Septic Certificate if the septic system is new only, confirming it complies with provincial or municipal requirements and certify that the soil and water pollution, septic system design and installation are acceptable. For existing septic, the risk is all on you, so get it inspected and check the old permits before you buy.
  • Well Drillers Certificate is required for new wells, indicating acceptable flow rate and potability.  For existing wells, the Appraiser will note in their appraisal report whether good water flow was maintained.

Below, we have a section on Frequently Asked Questions. If you would like to contact us, we'd be happy to provide a no-obligation consultation.  If you like this information, please share it with your friends using the social sharing icons.

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FAQs for Rural Mortgages

"Is there any way I can get a mortgage for a home with 160 acres with only 5% down payment?"

The short answer is not likely unless you are getting a smokin' deal. The CMHC-insured loans required for 5% down are meant for properties intended for residential use only, which generally means about 10 acres or less with no agricultural or commercial use or potential.  160 ac with home is possible to mortgage, but the 5% down would be calculated based on "residential lending value" which means value of the house, garage and ~10 acres. So if the property price is $500K and the residential lending value as determined by an appraiser is $350K, then in addition to your 5% down on the $350K, you'd have to also pay the $150K difference in values. While not likely, if the selling price is equivalent to the lending value, then you could buy with 5% down.  There is a slim chance of 5% down, if the owner was willing to finance the shortfall as a second mortgage. Plan B would be "vendor financing", where we attempt to arrange you a mortgage directly with the land owner (skip the bank and avoid CMHC rules.)

"If a home is on more than 10 acres, can I get financing for the extra acreage?"

Yes, but there are fewer lenders that will consider your application when the property starts to look more like a farm and less like a residential acreage.  A larger "recreational" acreage might be easier to finance if the land is not suitable for agriculture or farming, as an example. In some cases, we may also be able to arrange for the excess acres to be financed to about 50 to 70% of the appraised value and combine that with a residential home mortgage for the residential portion.

"Can I get a mortgage on raw / bare land?"

Yes, but the down payment requirements will depends on your plans and the property characterstics. If you are planning to build a residential home right away, more likely up to 75% lending is available until you build.  If the land is raw and un-serviced, then maximum loan may be limited to 50%.

Other questions?

If you or your client, friends or associates have any questions on this or any mortgage situation or need, please feel free to contact us and we'll do our best to answer your questions.  

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"Provided you are not planning to grow crops or raise animals for sale, financing a home in the country is quite similar to financing an urban home"

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