Buying a house, financing trying to declare it a "working farm"
My parents are buying an old farmhouse on 2.5 acres in central Illinois but have run in to a snag with financing. Lenders are trying to declare the property a "working farm" which would mean FHA will not finance it.
Has anyone run in to this before? How have you built the case that it is not a working farm? If the appraiser that visits is a country person, they will understand, but someone from the city may deduce that land + outbuildings = working farm
At 2.5 acres, I can't imagine just how it COULD be a working farm, what can you be producing on such a small piece of property. FHA shouldn't have issue with this, they will finance 10 acres with no issues, and actually even bigger, but only base the loan value on the house and first 10 acres. We have 50 acres and just refinanced with Wells Fargo with no issues with this.
Has it been previously designated as a farm? That is something that you will run into, tax deferment/reduction in tax value based on it being a farm. I could see the previous owners doing that, as we had this going on, and the closing attorney had to make sure when filing with the county that it was redesignated as residential, this hurts us for tax value when paying property tax, but we don't produce anything and won't fake it and run into issues with the tax man later.
You have to go to town hall and find out what the official zoning is. Every lot, every property has a zoning assigned to it - for example, the properties on my street are zoned R1, R2, or R3 and there are definitions of what that means - Residential 1 for example means it is zoned Residential, (not commercial, not farmland) and can have one dwelling on the property for one family. Only. You can't build a second dwelling and say, rent it out. R2 allows for one building for two separate residences, such as a two family house. An R3 allows for two separate buildings and I don't know how many residences in each. I think my R3 property where I live also has some kind of commercial or farm clause, where as its not farmland, it was once about 100 years ago a chicken farm, and I think I could rebuild the barns and have chickens or sheep or something and sell out of the property if I wanted, I have no clue, but its all in the town records, and
And a financing company cannot attribute anything to the property which the town does has not legally zoned it for, so your parents HAVE to go to the town and find out how the property is zoned and the financing company HAS to finance the property based on that zoning an dnot make up their own.
tell them they CAN'T just go by what the realtor says, they have to do it themselves. If it is some distance away and travel is a concern, often the town cleark in the zoning office can help them out over the phone, they are very nice, and all that.
...I am now at the stage of wine-surfing COTH
If the lender is applying an FHA rule then ask them to show you the FHA rule. That's before you go haring off after zoning records or anything else. If the lender is right then you're sunk with FHA. If not...
Of course maybe the parents should just call FarmCredit.
lender may be trying up the value of the property to cover the loan... my thoughts are the improvements can not appraise high enough to meet the price demanded therefor the FHA loan will not meet the needs of the contract. FHA just declares the property's lot size as in comparison to the near by properties.
Anything lot size greater is viewed as excess property by the FHA and not given any value
here is one of their notes about such:
If your parcel size exceeds what is normal and customary in your neighborhood, that is classified as excess land, and no value is assigned to it in an appraisal. For example, if a home in a subdivision has a 3-acre lot but almost all other homes have ½-acre lots, no value is assigned for the property over that ½-acre average. This occurs most often in a cul-de-sac.
Thanks for everyone's input. Clanter, this farm only has 2.5 acres and all the other farms really *ARE* working farms with thousands of acres (soy, corn, and windfarms). This place pales in comparison!