Hunting for Recreational Property? Three Things to Know.

If you have an appreciation for nature and the outdoors is there anything better than having a piece of property in the countryside? Whether it’s for hunting, fishing, four-wheeling or some other interest, having your own place to live out your passions, make memories with those closest to you and reconnect with the simple aspects of life is a dream come true. The question is: how do you make it happen?

For most people, purchasing a property for recreation takes a substantial amount of preparation. Most of us simply aren’t financially positioned to go out and buy property any time we feel like it.  And, even if you understand the general structure for securing a loan, there are a few unique things to consider when it comes to recreational land loans.

1. Down Payment Many lenders require a large down payment when financing recreational land.  At the same time, many people simply can’t achieve the dream if required to provide a large down payment.  If you are one of these people, look for a lender who specializes in rural properties. They are more likely to have programs available which require a smaller down payment.

2. Length of Loan For typical home loans, most lenders offer long-term fixed rate options in addition to adjustable rate options.   With recreational land loans, the industry maintains different standards for length and structure of the loan.  Many recreational land lenders do not offer a long-term fixed loan. Instead, you may be offered an adjustable rate mortgage (ARM), sometimes including a balloon payment. While ARMs can serve their purpose in short term financing, they may not be the best choice if you plan to keep your loan over a longer period of time.

Rising interest rates could spell trouble for you with ARM loan products.  As rates rise, you will be facing increased payments and as well as a greater amount of interest paid for a property.  In addition, if your loan includes a balloon requirement, you’ll be forced to pay the remaining balance or refinance well before your normal monthly payments retire the loan.  Working with a lender who offers long-term, fixed rates on recreational land loans can help you avoid the risks ARMs pose.  A long-term, fixed rate loan comes with built in peace of mind that the rate and payment will never change, regardless of what direction the interest rates move in the future, and if you make all your payments, you’ll own your property at the end of your loan term.

3. Affordability When thinking about buying a property that you can enjoy with your friends and family, it’s important to ensure your personal finances won’t be stretched too thin.

But how much is too much? Several factors impact a buyers financial decisions. Not all families have the same goals, risk tolerance and timeline. Lenders can provide guidance to you by calculating your ability to make an additional loan payment. This is called a debt-to-income ratio. That ratio tells a lender how much you are currently spending in comparison to how much you are bringing in and is actually simple enough for you to calculate on your own. Here’s a step-by-step breakdown of calculating debt-to-income ratio.

• Identify gross (before taxes and deductions) monthly income.
• Add up all monthly payments, excluding living expenses such as utilities, food and entertainment.
• Add in monthly taxes and insurance any properties owned.
• Use a simple mortgage calculator to project a monthly payment for the loan on all monthly payments excluding living expenses such as utilities, food and entertainment. The new property and add that, plus projected monthly taxes, to the monthly total.
• Finally, take the total monthly payments and divide it by the gross monthly income. The result should be a decimal of less than 1. Multiply that decimal by 100 to get the percentage of debt payments compared to income.

Your debt-to-income ratio shows how much income is going out for obligations that you must satisfy each month. Typically, lenders in the industry of recreational land lending would like to see that ratio at 0.40 or less. Therefore, if your debt-to-income ratio of less than 0.40, it likely means you can afford the loan on the new purchase.

Understanding the numbers equals power. Borrowers in the know can confidently make the best decisions for their situation. To many who enjoy the outdoors, the most important aspect of it all is sharing that time with others. If you want to ensure you will always have a place to do so, and the numbers add up, then purchasing a property in the countryside might be the right fit for you.

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