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Old 03-02-2014, 04:10 PM
 
Location: Washington State. Not Seattle.
1,896 posts, read 2,084,818 times
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Random question for anyone with construction loan experience:

What is the rationale for limiting construction loans to a specific number of acres?

We are looking for a Construction to Permanent loan for our 20-acre piece of land, but the loan officer at the first bank that we asked said that they only offer construction loans up to 10 acres. WHY? 20 acre parcels are quite common in my area. Of course, the loan officer's only reasoning was that this is "company policy".

She went as far as to suggest that we split the land up, which we have no intention of doing - we bought 20-acres because we wanted 20-acres, not 10-acres.

I can understand wanting to limit risk for the bank, but shouldn't that be based on the land's value, not simply the land's size? A 10-acre piece of land on the side of a hill is certainly going to have less value per acre than 20-acres of good, flat, usable land.

I don't understand. Can anyone offer any advice/reasoning?

Thanks.
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Old 03-02-2014, 05:23 PM
 
Location: Salem, OR
13,740 posts, read 31,550,338 times
Reputation: 12105
Quote:
Originally Posted by PS90 View Post
Random question for anyone with construction loan experience:

What is the rationale for limiting construction loans to a specific number of acres?

We are looking for a Construction to Permanent loan for our 20-acre piece of land, but the loan officer at the first bank that we asked said that they only offer construction loans up to 10 acres. WHY? 20 acre parcels are quite common in my area. Of course, the loan officer's only reasoning was that this is "company policy".

She went as far as to suggest that we split the land up, which we have no intention of doing - we bought 20-acres because we wanted 20-acres, not 10-acres.

I can understand wanting to limit risk for the bank, but shouldn't that be based on the land's value, not simply the land's size? A 10-acre piece of land on the side of a hill is certainly going to have less value per acre than 20-acres of good, flat, usable land.

I don't understand. Can anyone offer any advice/reasoning?

Thanks.
Fannie Mae and Freddie Mac buy residential properties on the secondary mortgage market. When you get above 10 acres, you are really talking about a business venture/farm. Farms are riskier because if you have a drought then the farmland becomes less valuable. During an economic downturn land loses value faster. It's just that simple. So...banks don't like to lend on it because it is a risker loan for them.
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Old 03-02-2014, 05:30 PM
 
4,787 posts, read 8,752,051 times
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Lenders are very wary of properties that don't fit into convenient boxes and checklists.

The problems with rural loans of a single house on large lot are these.

1) Can't get a decent appraisal. In a city or suburbia appraisers can find recent sales fairly close by. In rural areas, trying to find recent, closed comparables of your home design with similar square footage on similar acreage within a short distance is likely nil. Then the appraiser winds up driving over a wide swath of territory to try to put together something that looks like an appraisal. Lenders aren't happy because they feel they really can't prove the value.

2) The land may be worth far more than the house. Lenders want to loan on the house, not the land. Generally, they like the land to be no more than 30% or so of the total value of the property. On a 20 acre parcel this may not be so by a long shot.

If a lender has to foreclose they want to be able to take over something they can readily sell and unload. If for example, they have to foreclose on you and there is a many years long drought in your area, that 20 acre parcel may have lost most of its value. No one wants it and then the bank is stuck with it. Lenders don't like that thought.

3) Homes on 20 acre parcels sometimes turn into other than residential homes. Banks worry that what starts off as a single family home on 20 acres, soon may turn into a mixed use property. After closing, up goes a barn, a couple of hoop structures, some horses for sale, feeder calves, some chickens, veggies to be grown for sale. Now the land use has been changed from residential to mixed use commercial agriculture. Lenders not happy with that. That wasn't what the loan was for and lenders don't like taking chances.

Remember, this is harsh but true. Lenders aren't worried about your hopes and dreams. They are thinking down the road to what their liability might be. It's all about their financial bottom line.

After all that, you may still be able to find a lender for your project. You just need to learn where to look. Start talking to your local banks. You may need to find a portfolio lender. That is a lender who will write their own local loans and tailors the terms to each loan. These loans aren't sold on the secondary market but held in house. You may need a little more down and a bit higher interest rate. Thus, check into independent, local banks that have been around for decades. Stay away from national lenders.

Look into USDA loans- they have no maximum lot size. ( United States Department of Agriculture loans)

Importantly, look into the Farm Credit System. They may have a loan for you.

It can be done, it's just going to take some doing. Good luck.
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Old 03-02-2014, 06:11 PM
 
3,442 posts, read 4,469,478 times
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Good bare farm land values are soaring.

However, to get a loan on land most lenders are requiring a down payment of at least 40% cash or they want mortgage of other clear titled land you own that equals the 40% down payment.

( and proof of cash flow................aka " ability to repay "


I know what I posted is not apples to apples, but it shows how leary lenders are making a loan that involves land over minimum acres.

If they are reluctant to lend on prime farmland, I doubt they are eager to lend more on a hilly acerage building plot also.
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