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Navigating the Challenges of Buying a Home in the Country

Date: 
Author: 
Pete Hinrichs
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A recent real estate survey published in Better Homes and Gardens showed that almost four in ten baby boomers want to retire to rural communities to live in small towns or on farms. Likewise, people in their 20’s, 30’s and 40’s dream of living in the country for the privacy, open air and opportunity to manage a small business it provides. Lower interest rates, a stronger economy, and a growing number of workers with a home office have helped make the dream an even larger possibility.

Thus, whether you’re talking about a ten-acre apple orchard in Minnesota, an 80-acre former dairy farm converted to an equine boarding facility in Wisconsin or a 40-acre property in Illinois ideal for the production of organic crops, hobby-farm properties are in demand.
 
A hobby farm is typically a residence on a small holding or small farmette that is maintained without expectation of being a primary source of income. Some are merely to provide some recreational lead and perhaps a few horses for the family's children. Others are operated as working farms for incidental income, or are run at an ongoing loss as a lifestyle choice by people with the means to do so. The agricultural-related activity is not one that is primarily devoted to agricultural use.
Source: Wisconsin Department of Revenue

As powerful as the dream is for many prospective rural home buyers, there are financing challenges with this type of property. If you’re a W2 wage-earner, have a good credit score and low debt, you’d typically be in great shape for a home mortgage in the secondary market. That’s not necessarily how it works when looking for a home in the country. Secondary market residential investors such as Fannie Mae and Freddie Mac — who provide capital for many local banks — will generally reject rural properties with agricultural characteristics.
It’s important for buyers interested in these types of rural properties to seek out lenders that offer affordable, 15- or 30-year fixed-rate products and be prepared to provide documentation relative to any income derived from self-employment or hobby-farm, including a detailed projected income, expense reports and, perhaps, even business plans.

The Down-Low on DTI
Depending on the lending and risk philosophies, many lenders choose to follow Qualified Mortgage (QM) ability-to-repay (ATR) regulations for rural home loans with hobby-farm characteristics. The key is making sure your debt-to income (DTI) ratio no higher than 43 percent. Although many lenders establish their guidelines at the standard 36 percent DTI-ratio threshold, they often will approve ratios as high as 43 percent with compensating factors.
 
Factors that can warrant raising the DTI ratio include strong net worth, high cash reserves and credit histories that demonstrate the ability to handle debt. The DTI ratio is calculated by dividing borrowers’ total monthly debt obligations by their total monthly income, including revenues from the property itself. This is where documentation showing hobby-farm income becomes critically important.

Appraisal issues
Properties that populate rural America often have unique characteristics. Finding appraisers that understand hobby farms can be difficult, but lenders with experience financing rural properties should have a network of quality appraisers available to them. The main issue, however, is that hobby farms don’t fall into any sort of typical property that most appraisers deal with.

The country is full of appraisers that can appraise residential properties in cities or even rural homes with 10 acres or less, because it is much easier to find comparable sales in local market areas for these properties. You also can find appraisers that specialize in larger acreage/commercial type of properties, although these often have large appraisal fees attached to them.

Hobby farms come in all shapes and sizes, however, so lenders must possess the flexibility and acceptance of appraisals on this type of property. Finding even one comparable sale that has most of the same characteristics as a hobby-farm property can be a challenge. Appraisers must be able to widen the diameter of distances of the comparable sales to the subject property. They also may need to increase the number of properties used in their comparable sales analysis and perhaps even use a property that is currently listed.

Post-closing issues
Beyond the loan closing, owning a hobby farm can result in costlier than expected general property upkeep, not only to the home but also to the outbuildings on the property. Additionally, lawn care, landscaping, snow removal — in some parts of the country — and expenses related to hobby-farm activities can impact owner cash flow.

These are issues that may be new territory for new, hobby-farm-owners. Being prepared and budgeting accordingly can save a lot of headaches and stress.

For many, the benefits that come from owning rural property will far outweigh any challenges faced in financing, underwriting or post-purchase. Creativity in hobby-farm business concepts is prevalent all over the country. If done wisely, pride of ownership, a sense of accomplishment and the ability to enhance the rural landscape all contribute greatly to the upgraded American dream.

For more information on buying a home in the country, read our eBook Moving from the City to the Country: Eight Blunders Rural Home Buyers Make (and how to avoid them).
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