The District Chronicles

Issue date: 11/9/08 Section: Business

Media Credit: Freddie Allen

Dear Ms. Mortgage Maven,

I want to buy a two hundred-acre farm as a second home for $800,000. The farm has an adorable old house on it that I would like to restore. I have excellent credit and a great income. And the farm is making money - 100 acres of it is rented out to a neighboring farmer (the rest is wooded). I am having trouble getting a loan and I do not understand why. Can you please help me?

- M.N.

Dear M.N.,

You look at this property and see a charming old farmhouse that needs some TLC. You see yourself walking through the woods on a brisk fall day, or in the beginning of spring when the trees are starting to come alive, or in the heat of summer where is it 20 degrees cooler in the shade. You also see your neighbor, lovingly tending his crops (or cows?) on your property.

The bank sees it differently. Banks like to lend on the improvements to the land - that would be the house - which you stated needs to be restored. Banks do not like to lend on vacant land, and that is actually used in the production of agriculture is not an appealing prospect to a typical bank. Once you get above 10 acres, your options for loans get more and more limited, and large tracts in rural areas are worlds apart from the conventional financing that you deal with in the D.C. area.

Look at it from the standpoint of the bank's worse case scenario: you go into foreclosure, and the bank is stuck owning an old house in the middle of nowhere. Banks don't see charm - they hear an alarm - at this type of deal. Consider: could you get a loan for an opposite type of property, say an $800,000 house with absolutely no yard in Georgetown or Capitol Hill? In a second! Why? The bank wants to lend on the improvement to the land - in this case a house that takes up most of the lot, surrounded by an entire neighborhood of similar houses, built at the same time, in the same condition, worth the same value as this example house with no land. If this example house went into foreclosure what would the bank own? A valuable house that would be easy to unload to a large pool of potential buyers.

Traditional banks also will not want to finance the portion of your land that is devoted to farming and forest. You may be able to get a loan based on the value of that old house, which would be nowhere near $800,000, but you can have all sorts of issues when the appraisal is performed that could jeopardize any type of financing. Is it uninhabitable now? Are there comparable properties that have sold recently for the appraiser to assign a value to this property, or is it a "white elephant" - is your property unique in ways that make appraising the property extremely difficult?

It is very doubtful that a traditional bank will give you several hundred thousand dollars of financing for this property. Your best bet could be to go to a local bank in the town or county where the property is located. Ask your realtor, the seller or the neighboring farmer who is renting your land what bank they used to finance their properties. If anyone, a local community bank will have loan programs tailored to this rural community and be better able to structure this type of deal than other lenders. Best of luck,

Jessica White, also known as "Ms. Mortgage Maven," is a senior loan officer for a national bank with a branch in Fort Washington, MD. Call her with your questions 202-607-4449, visit her online at www.msmortgagemaven.com, or email her at Jessica@msmortgagemaven.com and you may get your question answered in this column.

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