How To Buy A Property With Acreage
With today’s busy lifestyles, many homebuyers are looking for laidback rural settings to establish their families. The goal behind buying properties with large acreage is to enjoy the rustic scenery and maybe even indulge in a little farming to engage in healthier habits.
However, while real estate with acreage has many attractive features, there are a few caveats to keep in mind when placing a mortgage on these properties. To help you understand what they are and how to overcome them when purchasing property, Martel Mortgages has explained how to buy a property with acreage.
1. Understand mortgage default insurance
In Canada, all mortgages with less than 20% down payment must be insured by one of the three insurers we have in this country, i.e., CMHC, Genworth, or Canada Guaranty. These insurers are typically paid for by the borrower, but protect the lender in case mortgage payments are not made.
If applications are submitted to a lender for approval with a total down payment of less than 20%, the file will also go to an insurer for approval. If this occurs, it’s crucial to understand that as lenders have their own set of rules for lending, mortgage insurers also have guidelines that they must follow. So, if the lender approves the file, but the insurer declines it, you have two choices, either you put in a 20% down payment or get declined for the mortgage.
2. Look at your purchase options
Once you understand the concept above, you can look at purchasing a property with acreage. All mortgage lenders will finance a certain number of acres, along with the home and garage (no other buildings will be considered for value). There are a few exceptions to this rule in the private lending world, but interest rates and down payment both go up significantly. It’s vital to understand that we are talking about residential lending, with no agricultural component (yes, that includes simple things like growing corn and hay). There are only some lenders that may consider agricultural zoning.
The number of acres they will finance is based on the norm for the area. Typically, the value will be based only on the value of the home and garage and a maximum of five or ten acres. These properties can be purchased with as little as 5% down payment, based on the value of the home (not the purchase price, we will touch on this later).
3. Note that properties of more than ten acres are looked at a little differently
Most lenders will generally accept properties as large as fifty acres with no agricultural component. Once the properties get larger than fifty acres, our pool of lenders shrinks significantly! For larger properties, we are mainly limited to the “Big Banks” and some alternative lenders. So, you may not be able to get that low-interest rate special. The financing also changes significantly based on the previous explanation of value. For example:
You see a property you love, with forty-five acres. You and the seller agree on a price of $300,000. A 5% down payment on $300,000 would normally be $15,000. The bank will do their appraisal of the house and determine the value of the house, garage, and ten acres (because it’s the norm for the area). The value comes in at $250,000. The bank will finance a maximum of 95% of $250,000, placing your maximum mortgage would be equal to $237,500. But of course, the seller wants to be paid for the other thirty-five acres, which means you would be responsible for covering the difference. Thereby making your total down payment $62,500!
The same concept applies for properties larger than fifty acres, but as mentioned before, the pool of lenders accepting these shrinks drastically.
4. Consider the water source for the property
Though well and septic properties are generally not a problem for most lenders, the water available through water outlets MUST BE POTABLE. The lender will ask for a water potability test, which your realtor should be able to assist you with.
As you can see, placing a mortgage on your dream acreage property can be done as long as you understand the differences between these properties and properties under ten acres. If you find it challenging to make sense of the details and what your options are, your mortgage broker is in the best position to advise you.
For a leading mortgage broker in Ottawa and Brockville, ON, reach out to Martel Mortgages. We are experienced in a variety of mortgage products and are renowned for our considerate services. When engaging with you to meet your financial needs, we make that we honestly guide you through the mortgage options available based on your needs. We take the time to listen to your inputs, your concerns, and your challenges. Based on these, we then shop around for the lowest rates and terms.
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