This summer, I have had the opportunity to assist a young couple scour the north and east metro for a small acreage property. We’ve searched across western Anoka, southern Chisago and northern Washington Counties, for something that will meet there small acreage requirements. Our search discovered the perfect country farmhouse on 40 acres and well within their budget too! My preapproved clients were excited when they wrote up their offer. Everything changed a day later when their loan officer called to inquire. “Are there crops growing on that land? ANY crops at all?” Well, the answer was yes. Suddenly the dream homestead had become a commercial property requiring agricultural financing.
No big deal, right? Wrong
The residential financing they were approved for limits property acreage to a maximum of 20 crop-free, acres. Yes, the land must be totally free of any planted crop when you use residential financing (even their loan officer was a bit surprised by this more stringent restriction). Of course the restriction is sometimes overlooked if the land is wetland and/or is densely wooded and therefore deemed unusable for farming. The whole situation was a bit of a surprise to my clients. They had never asked the questions as to whether there was a restriction on their preapproval for the size of the property. Of course this is partially because we just never expected to find such a large piece of land in their price range.
In order for my clients to purchase the property the fell in love with, they required agricultural financing. This is a whole different ballgame using a specialty lender. The mortgage will require a 15-20% down payment and it is only available at an interest rate significantly higher than what was quoted by their residential lender…Usually 2-3% higher.This can be a deal breaker if the original financing plan was 3% down FHA or a low down payment conventional loan with private mortgage insurance.
Why the difference? There are laws to protect farmers from foreclosure before the harvest. Current law seems to affect anything over 20 acres. It seems that underwriters have become stricter since the housing downfall. My understanding of the situation is this: If land has been rented to another party for farming, it would be very difficult for the bank sell the foreclosed land quickly. If there are crops involved, the crop would belong to the farmer not the bank.
If you are searching for a Minnesota hobby farm or small acreage property, it is very important to ask your loan officer the “what if” questions.
- What if I find the perfect home on 25 or 30 acres?
- What if half of a 20 acre has been rented to the neighboring farmer for a corn crop?
- What about a horse ranch that has 5 acres of hay planted?
Understanding how many acres are allowed using the financing you are preapproved is essential when shopping for a Minnesota hobby farm. Asking questions prior to the home search for can save you time and heartache as you search for your dream home.