Are you thinking of buying a property in a rural or maybe semi-rural area on some acreage? Maybe even a property where you can grow your own apples, peaches and other fruits or vegetables? For those who live in the suburbs and long to live on the land, buying a farm can be an ideal way to do just that. But as it relates to financing, a working farm would be considered a commercial enterprise instead of a single family home. However, there is an alternative for those who would like to buy a small farm and not have to resort to commercial loan programs with a higher down payment and higher rates. Buying a hobby farm can be the answer.
What’s a Hobby Farm
While there is no single definition, when someone is seeking financing, a hobby farm in most instances is a property which is primarily a primary residence where the home is used for pleasure and not as a business. This means you can buy a hobby farm and obtain competitive financing but still grow your own fruits, vegetables and raise horses. The property is used as a primary residence but also can generate additional income if that’s what the owner wants to do. There are some specific guidelines that must be followed and not every lender offers this program. In fact, sometimes hobby farm buyers go to their bank seeking financing and are not offered a hobby farm loan because the bank doesn’t have the loan program in its portfolio and instead puts together a commercial loan offering.
One of the more important aspects of obtaining a competitive hobby farm loan refers to how the appraisal will read. In addition, the appraiser making the inspection and evaluation should have recent experience in appraising rural and semi-rural properties. The appraiser must note in the appraisal report that the property is residential and not commercial. As with all appraisals, the report must state the property will be in its “highest and best use” as a residential property.
As it relates to any agricultural use on the property, the appraisal report must also comment that the commercial use has no negative or value and should be ignored and any agricultural use should not exceed 20 percent of the total acreage. This also points to any other structures on the property beyond the primary residence such as barns, storage and outbuildings. The appraisal must also search for similar properties that have sold in the area which can sometimes be an issue finding similar properties near or around the property being financed. However, these issues should be addressed in advance before making any application for a hobby farm loan.
What About Generating Income
For any income that is generated from agricultural or commercial use, it cannot be used as qualifying income. For example, a property sits on 20 acres and there is an active apple orchard. The orchard generates $25,000 per year. In a straight commercial appraisal, the income generated is part of the inherent value. Yet with a hobby farm, this income is ignored.
It’s also possible however that even though the orchard generates $25,000 per year it also needs $30,000 per year in labor and production costs. In this instance, the orchard causes a loss and must be included in the borrower’s debt to income ratios. For example, with an annual $5,000 loss, that comes to $416 per month in additional debt. These are hard costs and not a loss attributed to any depreciation.
How to Qualify
Those buying a hobby farm must qualify using their current income from their current job. This means providing the most recent paycheck stubs covering a 30 day period along with the last two years of W2 forms. For self-employed borrowers, the last two years of both personal and business tax returns will be needed along with a year-to-date profit and loss statement. Yet a hobby farm that does have some agricultural use can actually contribute to the buyer’s overall income, it’s just the income cannot be used for qualifying.
Zoning issues must also be reviewed to make sure the subject property is not in violation of any zoning laws which might make it illegal to have any agricultural use whatsoever. But again, a prior review of these guidelines before making an offer on a hobby farm is needed. Yet for properties that do meet these guidelines, competitive financing is available. Rates will be slightly higher compared to a single family home sitting in an urban or suburban area but still much more competitive compared to obtaining a commercial loan. Commercial loans will ask for a higher down payment compared to a residential property and loan terms are much shorter and can range anywhere from three, five to ten years.
If you’re thinking of buying a hobby farm of your own, let’s get your financing in order before making any offer. By providing the subject property address we can do some upfront research for you to determine whether or property is eligible for hobby farm financing. If it is, our hobby farm program is your ideal choice compared to any commercial or agricultural loans.