FINANCING RURAL LAND NEAR HOUSTON

Perhaps the most important single factor to consider when thinking about buying rural property is financing. Most buyers will need to obtain a loan when buying property in the country. Knowing how much you can borrow will define the rest of the process. Choosing a lender and getting pre approved for a loan is a good first step on your journey to having a place in the country. There is an old saying, “Serious property buyers start the process in the lenders office, not at an open house”. You can substitute land listing websites for open house.

Where to go for a Loan on Rural Property

Choosing a lender for property in the country is fairly straight forward. Farm credit institutions and local banks in the area of the property are the most likely source of funds. A gigantic national bank with branches on every corner is not the one to turn to for a land loan. Your land broker will be familiar with lenders in the area. Rely on their advice. They may even know of mortgage brokers interested in making loans on property in your area. Another possibility could be owner financing.

Pre Qualification Letter

Obtaining a letter of pre qualification is a good first step. The lender will give you a general idea of the amount they are willing to loan based on the financial information you provide them. This information generally includes employment, salary, other income, personal expenses including debt payments and income tax returns. Usually there is no application fee. This letter is preliminary in nature and does not constitute a loan guarantee. However, the fact you have begun the loan process shows your level of commitment. The primary benefit of a pre qualification letter is for your own information regarding the property you can afford. Obtaining a pre approval letter is even better.

Pre Approval Letter

Most sellers and brokers expect the buyer to have a pre approval letter and many will not show a property to a potential buyer without the letter. The pre approval letter is based on more information than the pre qualification letter. The pre qualification letter is basically information provided by the potential borrower and is preliminary in nature, while the pre approval letter is based on the lenders research. At this point, the lender will have performed additional investigation into the buyers financial background to include documentation of credit (credit check is paid by the borrower), assets, employment, at least two years income tax returns (to include schedules) and other financial obligations. Any unexpected problems (such as errors on your credit report) will have been unearthed and corrected. The pre approval letter usually includes the loan amount, term (length), interest rate, and down payment. The interest rate and term may vary with the down payment. The pre approval letter usually has a termination period typically 60 to 90 days.

Budget Considerations

You have already presented your current personal finances to the lender in the Pre Approval step and they have given you a good idea of what the loan payment will be. Now is a good time to assess what your budget will look like after buying the property. In addition to the mortgage payment, there will be ownership expenses such as ad valorem taxes, utilities, insurance, repair and maintenance, etc. A consideration of this information may give you an idea of the loan amount you want to seek.

Appraisal

Your lender will require an appraisal of the property you are purchasing. The steps discussed above in the pre approval process help the lender ascertain your ability to afford the loan payments. Additionally they will also have to make a decision about the property as collateral. The appraisal will be performed by a state certified appraiser chosen by the lender. The borrower is responsible for paying the fee. This appraisal should not be confused with a Brokers Price Opinion.

Inspections and Survey

The Farm and Ranch Earnest Money Contract will call for certain inspections you requested. Examples include condition of buildings, water well, septic systems, etc. The lender may also require some additional requirements such as repairs necessary to bring the property up to certain standards. They will also require a current survey. You will want to discuss inspections, appraisal, survey and any other requirements with the lender as early in the process as possible. Responsibility of payment for inspections and survey is negotiated by the buyer and seller. Ask your land broker to advise you as to surveyors and inspectors in the area.

Loan Commitment Letter

The pre approval letter is issued by an officer of the lender and is usually submitted by the buyer to the seller along with the earnest money contract. A loan commitment letter is issued when the lender’s underwriter has reviewed the letter of approval and the loan is ‘cleared to close’. One of the purposes for underwriting is to check on anything that has changed between the issue of the original pre approval letter and the final underwriting of the loan. Buying a brand new pickup with nothing down is not a good idea at this point. Another reason could be an appraisal, survey, title, inspection or other deficiency.

A loan commitment is basically a bank’s promise to make you a loan. The title company will require a loan commitment in the form of a mortgage which is a non-revolving secured loan. The final loan commitment will be based on an appraisal, survey and possibly other inspections. The property you are buying is the security and collateral for the loan. You have the right to refinance the loan.

Summary

The amount of money you can borrow drives the rest of the buying process. Obtaining a pre approval letter establishes the price, size, type and location of the property search. It also gives you the credibility necessary to be taken seriously in the market place. Rely on your land professional to choose the appropriate lender, surveyor, and inspectors.

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Allen Realty Advisors represents buyers and sellers of fine quality rural land near Houston. We specialize in weekend retreats, country estates, farms and ranches, recreational property and investment land. Our market area is generally within 100 miles (two hours) of Houston.