City life has its benefits with its coffee shops, Walgreen’s, and Red Box on every corner, but wouldn’t it be nice to live away from the bright lights and have some space to spread out? Recently, this has been a common request request by military Veterans. Not just an acre, but a lot of land. A piece of land where one can grow a garden, shoot a rifle, or raise animals. Yet, Veterans often run into lenders or Realtors® claiming that VA will not lend on properties with excess acreage. Otherwise known as farm residences. Not true! VA land loans actually have no limit on homes with land. Although, it is heavily dependent on the VA appraisal.
VA Land Loans Issues
If you make a call to a VA lender about buying a home with acreage, a common answer is “Sorry, VA has a 5-acre maximum.” We are here to tell Veterans this is not true. In the past week, we have received and approved 2 VA appraisals that have 25 and 31 acres each. So, what’s the big deal? Why is it so tough to buy a home with acreage?
Lenders generally look at land as a risk. Historically, properties with a lot of land would take longer to sell. Thus, in the case of a foreclosure, it is tougher for a lender to recoup its funds. Plus, the higher the value of the land in comparison to the overall price, it scares lenders even more. Generally, as loans get risky, lenders require more down payment among other requirements. Although, this is not the case with VA land loans! This actually gives Veterans an advantage over other buyers in the country, but we still have to deal with this excess acreage issue and the lending environment. In general, homes with lots of land must have 3 key parts: a qualified borrower, the appraisal with similar comparable sales, and a VA lender which allows for more than 5 acres.
VA Appraisal Issues
In order to finance a home with excess acreage, there must be sales with similar land attached. Lenders, Realtors®, and appraisers call this comparable sales or “comps.” Most mortgage loans require appraisals of homes with 5, 10, or more acres to have proof of recent sales with similar sized land. So, a house with 10 acres should not typically be compared to a home with a half acre in a subdivision. They are not similar properties and it would not show there is a market for homes with lots of land. Basically, the property is unique to the area. Remember, lenders do not like to lend on unique properties.
Alright, we have established that lenders require sales of other homes with excess land, but VA actually stretches this area in favor of a buyer and seller. For instance, a recent VA appraisal for a home with 31 acres had comparable sales which include 4, 1.5, and 10 acres of land. That is a big difference that many lenders and loans would not like. Yet, this appraisal and property were approved for VA financing!
Buying a Home with Land Requires Research
Whether a Veteran or a Realtor working with a Veteran on a purchase involving lots of land, up-front research is key. First of all, getting pre-approved for VA land loans, in general, is important. This involves talking to an expert loan officer who is well versed in VA loans. Actually, not just VA loans but VA land loans. The next key area involves research. Research on the actual property and the market.
Research on the Home
- Land survey
- Well water test
- Septic inspection
- Timber assessment
- Walk the property
- Home inspection
- Termite inspection
Most of the items above are pretty common, such as a home inspection or termite inspection, but buying a home in the country typically involves a well and/or septic tank. It is always a good idea to have these tested. Buying a home with lots of land involves a little more. Certainly, ask for a survey. Understanding the property lines plus the location of the well and septic are important. If there isn’t a survey, talk to your Realtor® or real estate attorney. See if there is a reason to get one. Maybe the property has a lot of timber. This could actually create an income if sold to a timber buyer. So, it could be worthwhile to speak with a timber consultant. Finally, walk the property and check out the surroundings. See if there is marshland, a trash dump, or maybe just the most beautiful place for a garden or a pond.
Research the Local Market
Let’s say a Veteran finds the perfect home and wants to use a VA land loan to finance it. Ask your Realtor to speak to your OVM Financial loan officer as well as research the local real estate market. A knowledgeable, local Realtor® can research recent sales to determine if there is a market for the property. Basically, make sure an appraiser should be able to find comparable sales with excess acreage. Realtors® are able to pull recent comparable sales just like a VA appraiser would. By researching the market, it decreases the chance of going through the loan and appraisal process only to get a bad appraisal result.
In most markets, the difficulty lies in the fact that there are usually not many recent sales with lots of land. Therefore, it is tough to determine a sales price. That’s also part of an expert Realtor’s® value to a buyer. In the research mentioned above, a Veteran’s Realtor® would also help decide on an offer price. Something else to consider is the home’s surroundings. Is there a current hog farm or landfill nearby? This could create a value issue and probably a smell issue. Certainly, a potential negative of being in the country is lack of zoning requirements. So again, research is key.
VA Land Loans Guidelines – Farm Residences
Hopefully, we have dispelled the 5 acre VA limit myth. This limit only exists because a lender has added their own additional guideline. Here’s the proof for the actual VA guideline related to homes with excess land or as VA calls it – farm residences. It is located in the VA Lenders Handbook-VA Pamphlet 26-7. Chapter 11: Appraisal requirements, Topic 12. Other property types and situations, section g. Farm Residences. The guidelines state:
“Although VA does not make farm or other business loans, the law allows veterans to use their Loan Guaranty benefit to purchase a farm on which there is a farm residence. VA does not set a limit on the number of acres which the property may have.”
The appraisal of properties with acreage should not present difficulties if a sufficient number of similar properties in the area, which may include improvements not typically considered residential (i.e. barns, sheds, corrals, stables, pastures), were recently sold primarily for residential use. For VA purposes, the valuation must not include livestock, crops, or farm equipment and supplies.
In any case, individual improvements not typically considered residential (i.e. barns, sheds, corrals, stables, pastures)will be valued at their fair market value on the basis of the use of the property for residential purposes only.”
VA Loans For Land
Now you can forget everything you have heard about VA land limits of 5 acres. We have proven it with the actual VA guideline plus explained the process. An additional point we want to make is that VA will not lend on just land. Acreage is fine, but there must be a home on the property to be occupied by the Veteran. Earlier, we mentioned the 3 key parts to financing VA land loans which are:
- Qualified Veteran
- VA appraisal with similar sold homes to support value
- VA lender that will lend on acreage
So, we have #3! OVM Financial understands properties with acreage. Next, if you are a Veteran or working with a Veteran who qualifies for a VA loan, then we have #1. Then, it just comes down to a VA appraisal which supports the purchase price. If country living is your dream, contact us to learn more and start the VA approval process.