My husband and I recently went through our first experience buying a home and like many people these days, our purchase was considered rural. These days many people are forgoing the typical city home and looking for their little piece of paradise with more desire to become somewhat to fully self sufficient. Read on to see what you need to know to make your dreams of owning land, a farm, or self sufficient home come true in the easiest, best, and most lucrative, ways possible.
1. Loan Types
Rural land is becoming easier and easier to finance. There are a few different types of loans that work for this type of property and the one you chose should be dependent on what works best for you but also what is accepted by the county or lender for a specific home.
The first type of loan that you can purchase rural property with is an FHA loan. An FHA loan is a first time home buyers loan and does cover many rural purchases. This loan requires mortgage insurance in case of a default on the property so the end monthly payment may be a little higher but it takes far less to be able to get approved for an FHA loan then any other type of loan. With an FHA loan you are also required to take a first time home buyers class which is actually a really awesome resource for homebuyers. These classes are free if taken in person, or cost a little if done online but I would highly recommend taking them in person so you can ask any questions you have. Taking this class saved us A LOT of time and money and gave us insight that wouldn’t have happened had we Googled our questions. When buying a home you don’t want to take “the shortest route”. Make sure you’re getting as much information as possible as this is a legal agreement you’re stepping into for the next 30 years and a bad deal or misinformation can cost you everything. An FHA loan also has great government grants and loans outside of the initial loan, that can help you pay for downpayment and closing costs. Make sure you ask your mortgage broker what options are available for the county, state, and specific home your looking at to insure you’re getting the most assistance possible. Since an FHA loan doesn’t have as strict of guidelines your credit also doesn’t need to be as high as with other loans, whichcan also help your interest rate. And although an FHA loan does require mortgage insurance, depending on your interest rate this option might not be that more expensive then a USDA Loan, which specializes in rural properties.
A USDA loan specializes in rural properties which is great for a few reasons. When you get your home appraisal you want someone who specializes in that type of property. USDA loans are very strict with their specifications on what makes a property “profitable” which is prohibited with this type of loan. With a USDA loan owners are not allowed to use the land for profit such as for profit farming, using a shop on the property for industrial services such as auto repair, welding, construction etc. If you’re plan is to use your land for profit it would be better to look at your other options. If however, you are only wanting the land for your own personal use and enjoyment and the property has any outbuildings, shops etc. and you get the property appraised by an appraiser through a loan such as FHA, they usually don’t have the same knowledge and experience with that type of land which may hurt you in the long run. When my husband and I were looking at a house that had a loafing shed the FHA appraiser didn’t know if it would pass because they thought it could be used for profit. Once the USDA appraiser saw the property it passed with flying colors. Having knowledgeable professionals working with you is a must during this process and USDA appraisers our hands down better for a rural property.
2. Homeowners Insurance
Homeowners insurance is covered in the loan and applied to your monthly mortgage cost. You’ll need to contact the insurance company you chose and forward their information to the lender you’ll be working with. Rates will vary based on size, and style of property and are rated on a scale from 1-10. This scale determines how much you’ll be paying based on the hazard level of your property. Rural properties with a lot of tress, national forests, or other fire hazards will cost you considerably more than a home located in town, next to a fire station. The insurance companies may even contact the nearest fire departments to answer some questions. If there is no fire hydrant located on the street your price will increase, and there must be a fire station (volunteer fire stations not included) within five miles of the home. Without all of these things you’re looking at few companies that will insure the property, along with the highest rates possible. There are a few things that can cut the rate slightly which include a home security system. If you have a home security system setup the insurance agents will consider it less of a hazard and lower the rates but only by a little, and depending on the insurance company you work with it may even out in the end. It’s valuable to get an idea of what your home owners insurance will be as early on because it’s included in your debt to income ratio and if it’s too high it could actually cost you the loan if you already have a high debt to income ratio. Make sure you get an idea of these rates and discuss it with your lender as soon as possible so they are considering the highest rates possible and it doesn’t come back to bite you later.
3. How Much Should I Have Saved When Buying A Home?
How much money down do you need when buying a home? That of course depends on a million factors as to what type of loan your approved for, who covers closing, if you get approved for grants and so on, but how much should you have saved bare minimum? A good rule of thumb is to have at least three months of mortgage payments in savings plus at least $1,000 for closing. The lenders want to see that you have at least three months of “just in case” money in the bank so that if the worst happens, you won’t have to go into foreclosure. If you were to get sick or lose your job you would have three months of savings to get on your feet or sell and not go into default which is very comforting to the people lending the money. If your payment is $1,200 a month that would mean having at least $3,600 saved just for that portion. You can get a loan without this but it ups your odds greatly to have it and with how the market it right now if you don’t have the savings and put in an offer and the someone else puts in an offer with that and some, you might not be accepted. It’s a competitive market right now so you want to make sure all your ducks are in a row before game time.
With our deal, the seller was willing to pay $5,000 in closing costs and we were approved for a few different grants which meant we only had to come up with a very small amount of money for closing. However, with our loan type we were still required by law to pay at least $1,000 to close. Had we not received all the grants and closing costs, closing would have been about $11,000. There’s also a limit to how much the seller can cover for closing costs. The standard amount to ask for is $5,000, sometimes $6,000 and the usual maximum is $7,00 but is rare to get. It’s important to know these numbers because when we went into the home buying process we were unaware of how much down and in savings we would actually need. There are lenders who will say there’s no money down, sellers who won’t cover closing, and grants that won’t get approved so knowing these numbers at least gives an idea of what you’re looking at. As I said, these amounts vary greatly but the best thing you can do is ask your mortgage lender. When you first meet with your lender and get an idea of what you can get approved for ask them the numbers based off of your credit, loan type you’re looking at, and cost of the home. Even if it changes a little, it’s easier to come up with a little money at the end then trying to come up with thousands of dollars right before closing.
4. Work With A Real Estate Agent Who Specializes in Rural Properties
Before we had signed with an agent my husband and I were doing drivebys of homes we liked. At one of the country homes we liked we met a realtor that was showing the property. After asking her some questions and getting to know her a little better we decided to meet with, and eventually sign with her. Upon one of our meetings I asked, “do you specialize in rural properties?” She replied, “I don’t specialize in them but I have experience with them.” That should have been a red flag right there. Why? because there is a big difference between urban and rural homes and lack of knowledge in rural properties can be devastating to a buyer. Example: When we got the house inspection the inspector mentioned the well (most rural properties are on a shared or single well) and had some questions about the condition, repair, installation and so on. Our agent knew nothing. She was completely unaware of any of that information which meant we hadn’t requested a well inspection. He then told us a story of a couple who were purchasing a home with a well and were mere days away from closing before deciding to get a well inspection. Upon inspection they learned there was a tree root obstructing the well and the repair would cost $20,000. Had they not done the inspection they would have closed on the home and accepted a $20,000 bill for a new well.
Rural properties have wells, irrigation, and many other things to take into consideration that are absolutely dire to have all the ins and outs on. If your agent is unaware of how the properties and laws work, your dream home may end up becoming a burden and bottomless pit you have to put money into.
5. Covenants and HOAs
You buy your home and decide to start a farm, get some animals, live off the land and do whatever you like, after all, you own the property, you can do whatever you want right? Not so fast! Even rural properties have HOAs now, and something called Covenants. Covenants are similar to HOAs and consist of community rules that must be abided by. HOAs usually include fees and dues and well as the rules whereas covenants usually only require the community guidelines to be followed. For some people this is totally acceptable and they find it quite simple to live within the terms of the community but for others it can be a deal breaker. My husband and I found a home we really liked and were interested in possibly putting in an offer. Upon researching the home we discovered it was part of a covenant which only allowed two horses and no other types of livestock, chicken, goats, or anything else, which for us, was a deal breaker. All covenants differ so if you are looking at a home within one of these communities do some research to see just what guidelines and restrictions you would have to follow.
When in doubt, research and talk to the professionals you are working with. There is so much overwhelming information when buying a home, make sure you have a good solid team that you can put your trust in and stay as informed as possible during the process.
I would love to hear from you! Please comment and let me know what types of issues or concerns arose for you during your rural home buying and what did you do about it? What types of things were you not informed about? What do you wish you would have known? Home buying can be stressful but by sharing our experiences we can pay it forward and help take the stress out of someone else’s experience. I look forward to hearing from you and thank you for sharing!