Goin' country: Buying a house 'down home' has rules of its own
By Michael D. Larson • Bankrate.com

Yankton, S.D., (1998 est. population, 14,325) is about as far from New York City or Los Angeles as a person can get. It's got a couple of manufacturing plants and Avera Sacred Heart Hospital, and yes, Tom Brokaw once called the town home. But beyond that, it's just one small city surrounded by a whole lot of country.

Sound like the perfect place to move? Many Americans think so. They've decided the best house has a yard measured in acres and is miles away from the nearest neighbor. But before you trade that daily subway ride for a lot full of feeder calves, you should spend time studying up on how home loans get done in the country.

Surprises for city slickers
While many mortgages in Minneola, Kan., are the same as those in Manhattan, others vary significantly. Depending on the size of the property and what you want to do with it, among other factors, all sorts of odd restrictions can apply to the loan. People who don't learn the ropes will likely find out how expensive 40 acres and a farmhouse can be.

"Just to first clarify any perception that because we're a bank from way out in South Dakota where there's no trees and no cities, we don't utilize national mortgage programs as if we were in the middle of a large metro area, that's not founded at all," says Jim Kirk, vice president of residential real estate at First Dakota National Bank in Yankton. "We use the same traditional markets.

"But if at some point the subject property that is to be mortgaged is not considered residential enough or at some point we cross the line where it's no longer just residential property and it's mixed-use property, is that property then eligible for traditional mortgage products? Often, it is not," he adds. "Properties can be financed and there are ways to do it, but the thing is, you may have to come up with a higher down payment or go into higher interest rate or some kind of subprime loan."

Rural lending has gotten more progressive over time, but it still involves unfamiliar twists and turns that consumers accustomed to buying in cities and suburbs might not expect. In a subdivision, for instance, appraisers value homes by comparing their sales prices to the prices other units within several blocks have fetched recently. But rural homes can be miles apart and come with vastly different amounts of land. That makes it difficult for appraisers to find "comps" -- or comparable properties -- they can use to value the property being purchased. Many rural families live in the same homes for generations, too. So, there may not be recent sales figures to use.

"Lenders are looking at if there's a large adjustment on the appraisal for land," says Virginia McGhee, program coordinator with Colonial Farm Credit in Mechanicsville, Va. "If your subject is a 40-acre parcel and all the appraiser could find were five-acre parcels or 20 acres, is that comparable? We doubt it."

When hobbies go fowl
Lenders can get nervous about land use, too. Many borrowers enjoy country living because they have enough space to try their hands at raising a few chickens or growing vegetables for sale at a neighborhood market. But people who generate too much of their income from this sort of "hobby farming," or those who devote too much of their properties' acreage to farming, can run into trouble. Mortgage companies sometimes have to treat such properties as mixed-use rather than purely residential. In those cases, borrowers typically get stuck with higher interest rates, higher down payment requirements and other mortgage hurdles.

"Here I've got John and Mary Doe. They work in town, but they live on a 15-acre hobby farm. They have a couple, two or three buildings on the farm that are special-purpose buildings built specifically for the raising of livestock. They may feed a few feeder calfs or raise horses, not for the family's entertainment but for commercial purposes," Kirk says. "Those are the kind of properties that fall in the gap.

"It's hard to find a product to finance those because that's where the hole exists."

Even borrowers who don't plan to farm at all can run into problems when they're looking to buy country homes surrounded by a significant amount of land. Mortgage lenders and the secondary marketing agencies that buy their loans, Fannie Mae and Freddie Mac, like when most of a purchased property's value comes from the home, rather than the lot, experts say. That's because rural land can lose its value much faster than a suburban house if there's a regional drought or economic downturn. Lenders get left holding foreclosed property they can't sell for enough to cover their loans when that happens. As a result, they either charge more for the loans or won't make them at all.

"They're not going to get into significant acreages. There's a number of five acres or 10 acres -- some number always pops up," says Tom Griffin, vice president of AgFirst Farm Credit Bank. The Columbia, S.C.-based company is a member of the nation's Farm Credit System, a collection of small bank-like institutions that make rural loans and larger banks from which they borrow money for those loans.

"That's the major item, the major obstacle."

Though these issues can get in the way, consumers needn't give up hope. They may have to get loans that don't fit the standard secondary market bill. But that carries some benefits with it.

Room to run
Lenders typically have more leeway when it comes to charging closing costs and setting terms on portfolio mortgages (mortgages a bank holds on its books rather than sells off via Fannie Mae or Freddie Mac). If interest rates drop, they can modify a loan's rate and payment to reflect market conditions rather than require a full, expensive refinance.

"When we do an in-house loan, we find ways to eliminate a lot of the settlement costs that we have no way of eliminating on a traditional, conforming residential mortgage," says First Dakota's Kirk. "We might waive appraisals, waive surveys, waive underwriting fees or not make escrows mandatory."

Of course, the best things in life aren't always free. Banks may restrict portfolio loans to terms of 15 years or less, require larger down payments or charge higher rates. That's why some rural-property buyers may want to consider helpful government programs.

The U.S. Department of Agriculture's Rural Housing Service offers a loan guarantee program that's similar to the Department of Housing and Urban Development's Federal Housing Administration program. Just like HUD, the USDA gets lenders to offer lenient loans by promising to offset their losses in the event borrowers default. The USDA mortgages, which have been around since 1991, require no down payment. Consumers who earn up to 115 percent of the area's median income can use the loans to buy properties in communities with less than 20,000 people.

"The program was started because there was a lack of credit in rural America primarily and we still see that," says David Villano, deputy administrator for the USDA's Rural Housing Service. "Rural America doesn't have the same access to credit that people in more urban areas do."

Leveling the fields
Times are changing, though, according to many experts. The federal government, Farm Credit banks and secondary marketing agencies have been working toward leveling the playing field between rural, urban and suburban home buyers for a couple years. As a result, many rural borrowers can now get the same conventional loan rates and programs available elsewhere.

"The interface between rural homeowners and the large urban secondary market hasn't been perfect and I'm talking about Fannie and Freddie in particular," says John Blanchfield, director of the American Bankers Association's Center for Agricultural and Rural Banking in Washington. "But both of them have made real efforts in the past few years to bridge that gap.

"We still run into problems in rural America with homes not fitting the standard box that an urban or suburban property might fit," he adds. "But I think people are making a greater effort on this."

AgFirst, for one, offers two programs in cooperation with rural lenders, Fannie Mae and another less-familiar sister agency nicknamed Farmer Mac. Borrowers can get mortgages through the programs, which have more lenient guidelines on acreage and land use, at conventional rates.

"If they are a creditworthy borrower," Griffin says, "they shouldn't let some of the property characteristics that they're looking for prevent them from getting a conventional, residential mortgage product and conventional, residential mortgage interest rates."

All of these unfamiliar conditions and caveats can trip borrowers up, so experts recommend carefully planning before any big move to the country. Buyers may want to save up more down payment money or consider government loan options, for example. If they need to go with private lenders, they should find ones that offer conventional rates even on oddball properties. Or, they should track down companies willing to shave closing costs on portfolio loans. Those who do so will be well on their way to sipping sun tea in no time.

"During most of the 70s and 80s, rural America experienced huge population outflows. But during the 90s, most of rural America has experienced population inflows," says the ABA's Blanchfield.

"This is a real big thing for a lot of the country and there's a lot of opportunity for folks."