Financing Your Rural Dream
If you’re dreaming of a country lifestyle, financing a rural property comes with its own set of challenges and considerations. To help you navigate this journey, here’s what you need to know about buying and financing rural properties.
Buying Raw Land
When it comes to buying vacant land to build your dream home, be prepared for a larger down payment. Typically, you’ll need to put down between 25% and 50% of the land’s purchase price. For instance, a one-acre lot close to the city might require just 25% down, whereas 80 acres of farmland could demand 50% down. Additionally, raw land loans usually come with higher interest rates compared to traditional home loans.
Building on Your Land
Once you’ve secured your land, there are a few ways to go about building on it:
Self-Build: If you choose to handle the construction yourself or manage contractors, you’ll need a self-build draw mortgage. These are not commonly offered and require significant cash upfront. Be aware that certain costs, like utilities and well drilling, may not be covered by the mortgage.
Builder Draw Mortgage: This option involves hiring a builder to handle everything for you. While more lenders offer this type of financing, there are restrictions and less flexibility in interest rates. Draw mortgages advance funds in stages throughout the build, and some lenders may lock in the rate at the first draw or adjust it at completion. Be prepared for setup fees and inspection costs.
Completion Mortgage: This is the most common for city lots. The builder buys the land, builds the house, and you pay the down payment upfront. You then get a mortgage when the project is completed. This option is less common for rural properties but can be available in some acreage subdivisions.
Well, Cistern, and Septic
Rural properties often lack city services, so you’ll need to consider alternative systems:
Well vs. Cistern: Understand the difference between these water sources and their costs. For example, filling a cistern might add $300 a month to your expenses. Make sure to account for these costs in your budget.
Septic Systems: Know the differences between septic holding tanks and systems with pump-outs. Ensure these systems are in good condition before purchasing. Lenders might require a satisfactory water test and septic inspection.
Inspection Costs: Rural property inspections can be more expensive than city inspections. Budget for these costs and be aware of potential future expenses if you plan to make significant changes to the property.
Down Payment Expectations
One common issue is the down payment required for rural properties. In Canada, the minimum down payment for owner-occupied residential properties is 5%. However, mortgage insurance, which is required for down payments less than 20%, typically covers only the house, garage, and up to 10-15 acres of land. This means you may face challenges if the property includes more land or outbuildings.
With more than 20% down, lenders can value the entire parcel of land and any outbuildings. For cultivated farmland, you might face even stricter requirements. Be prepared for potential issues with appraisals and ensure you have sufficient funds to cover any gaps.
Hobby Farms
If you’re interested in a hobby farm, be aware that many lenders are hesitant to finance properties with hobby farm components. This can limit your financing options, so plan accordingly.
Agricultural Lending
For properties intended for agricultural use, you’ll need to explore agricultural lending options. These come with different rules, interest rates, and lender requirements. Typically, local credit unions, Farm Credit, and ag divisions of major banks offer this type of financing. You might need to present a business plan and demonstrate capital for starting your farming venture.
Unique Property Features
Rural properties can come with a range of unique features, like manufactured homes, off-grid setups, or income-generating elements like oil leases. Each of these can present additional challenges for financing. Work closely with your broker to address any specific financing issues related to these features.
Final Thoughts
Remember, a pre-approval only confirms your ability to afford a certain price range. It doesn’t guarantee that the specific property you choose will be financed. Different lenders have different criteria, so if one bank can’t finance your property, another might.
To navigate these complexities, work with a knowledgeable broker (hint: that’s me!), a realtor familiar with rural properties, and a lawyer experienced in rural transactions. With the right team, you’ll be well on your way to country living.