Acreage Loan Program - Key Features and Considerations
Rural properties are a higher lending risk category than urban properties, hence have some different lending rules to navigate.
It is important to know that lending money is always about managing risk for the lender, risk that you'll pay them back as agreed. In the event of a non-performing rural loan, lenders understand that these properties historically take longer to foreclose (seize and sell) 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 because prices can fall, so they have special rules especially around down payments and land use to help reduce their risk. (I tell it like it is!)
Borrower Qualification
- Canadian resident
- Standard mortgage qualifying criteria apply including full income verification.
- Alternative and private lenders catering to acreage financing for self-employed (low taxable income) borrowers or poor credit borrowers are very limited.
Eligible Loan Purpose
- Purchase or renewal
- Refinance
- Owner-occupied or rental
- For farm loans, call Farm Credit Canada.
Eligible Properties
- Generally, 10 acres or less (but up to 160 acres upon exception).
- Must have a house (or a newer manufactured home on an approved foundation) in good condition.
- Residential-use only. 1
- Zoning: Country Residential, Agricultural, or ALR. 2
- Water & Septic available (discussed below)
- Power and gas available (while propane is okay, home cannot be off-grid)
1 If the applicant will generate income from farming (or commercial operations), then a Farm Credit Canada (or bank commercial) loan is required instead. This is because foreclosure laws generally require a 12-month waiting period (full crop cycle) for "farm land" property foreclosure, compared to 3 months for residential lending.
2 Municipal zoning will dictate "permitted land uses". Properties zoned 'Country Residential' are for residential use only, not for agriculture or commercial activities, hence are easy to get lender approval. For properties zoned 'Agriculture' or similar, allowing both residential living and farming as permitted uses, lenders base loans on the value of the dwelling, garage, and up to 10 acres. This approach generally necessitates a larger down payment from the borrower, enhancing the lender's security. We talk about down payment further below.
Down Payment Requirements
Scenario 1 - when you have under 20% down payment
An acreage under $1 mil. can be bought with as little as 5% down payment, but only under a residential CMHC-insured or similar lending program and provided the property meets the residential lending rules.
- The property must have a house in good condition (ie. 25+ years of 'remaining economic life')
- For properties greater than 10 acres1, the maximum loan you can get is calculated as a percentage of a term called the "residential lending value," which means the value of the house, garage and ~10 acres.
- As an example, 95% LTV (or loan-to-value) lending means they'll lend you 95% of the residential lending value, which could be lower than the the purchase price. You make up the rest.
- The residential lending value and remaining economic age is determined by a licensed property appraisal who visits the property.
- The appraiser is instructed by the mortgage insurer (CMHC for example) to value only the house, one garage and ~10 acres and to give ZERO value to the excess acreage and zero value to any outbuildings (equipment, shops, barns, corals, arenas, additional garages, or any other buildings like a second house or quonset).
- If the purchase price exceeds the residential lending value, you must pay that difference from your own pocket, in addition to your minimum down payment based on the residential lending value. If it is the same value or less, then the minimum % 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 (~8% down payment).
1 Some lenders allow a maximum 5 acres with country-residential zoning only. Others can go up to ~20 acres in the value. Our advice is to use a mortgage broker an experienced in acreage lending to locate the best lender options for your situation.
Scenario 2 - when you have 20% down payment or more
- Generally, up to 160 acres, home and garage can be financed with certain lenders, up to 10 acres with others.
- The residential lending value is determined by a licensed property appraisal who visits the property.
- For property's under $1M, but with residential lending valuation issues, we can sometimes structure the loan with CMHC-insurance to free up cash to cover the excess of purchase price over lending value to make your down payment work.
- An acreage priced at $1 million or more must have at least 20% down payment based on the appraised 'residential lending value' (per discussion above)
Water & Septic Requirements for Acreage Financing
In order to live in house, you and your family need to be able to drink the water and flush the toilet. That's taken for granted 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 health problem. A new well might easily 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 acreage ownership problems to become their problems, so they may insist on more paperwork before an approval OR they will require that you have a Title Insurance Policy that protects the lender in the event you to bail out on your mortgage and they have to foreclose. Whether the lender requires it or not, your own due diligence should confirm the following:
- 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. This should confirm for you that the installation 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.
Typical Rates and Terms
- Interest rates and conditions for acreage financing mirror those found in urban environments, with the distinction that lender options for acreage buyers are limited to only those who offer acreage mortgages, a smaller pool compared to the broad spectrum available in major cities.
What transaction fees should I expect?
- Appraisal Fee: $400-$650 for rural areas (depends on appraiser's commute), however when using CMHC-insured lending the appraisal is often picked-up (no cost to you).
- Legal Fees: $1200-$1500 (same as urban deals)
- Brokerage Fee: typically brokers are paid a ~1% commission from the lender.
- Land Transfer Tax: (there is no land transfer tax in Alberta)
- GST may apply when purchasing from a farmer. When negotiating price, always make sure that the price includes any applicable GST.
Above, we delved into the intricacies of financing acreage properties. However, the key question remains - can you, specifically, qualify to secure a mortgage for a desired acreage property (or any acreage property, for that matter), and what might that process entail? It requires a careful alignment of various factors to make it a reality.
If you are interested in exploring your options, feel free to reach out to us for a no-obligation mortgage pre-approval consultation.
Below, we have a section on Frequently Asked Questions.
To accurately answer any specific mortgage question, such as "can I qualify", we need some basic information about you, where you are located, and your objectives. While there are many lender programs in Canada, only some will apply and some won't depending on the property and your financial situation. The goal is to find the options that you do have, what we like to call the "sweet spot!"
