Expert: Meg Ritchey - 9/2/2009

Question
Hello. I bought and built a home on 2 acres of land.My wife and I have a USDA loan on my new construction/land. There is another 2.5 acres next to us we would love to purchase. Is this even an option for us as far as USDA guidelines? Would we have to refinance all over again to add the land in our loan? Could we buy land using equity or security on our house. I know I could afford the payment if it was added into our Home loan for 30 years.. I really hope this makes sense. I thank you an advance for reading this!! Mark

Answer
There are several areas of interest with regards to structuring the purchase of the new property.
1. According to most home mortgage guidelines, the land cannot be worth more than 30% of the total appraised value of your property.  
2. What is the current balance owed for your mortgage?
3. What is the rate of your current mortgage?  Is it fixed or adjustable?
4. How long have you owned your property?
5. USDA is primarily for the purchase of a primary dwelling.  This new purchase is thus outside of their lending guidelines.  

It sounds like you are considering a purchase that may be difficult to accomplish under conventional or FHA guidelines. The only conventional or FHA financing option that I could suggest would be a cash-out refinance of your current mortgage.  This type of loan would refinance your current mortgage, rolling into the new loan all closing costs and prepaid escrow items, like your property taxes and hazard insurance.  Then after all costs are included with the pay off of the current loan, any eligible equity left in your property can be used to purchase the additional acreage. In other words, you would have little out of pocket expenses and you could roll the purchase of the new home in with the current mortgage into the new mortgage.  So, the way to roughly estimate if you have enough equity for this type of loan is to use the following equation:
The current appraised value of your home times 80% minus the payoff,closing costs and funds to establish new escrows = money left to buy new property.  

For example, if your house is worth $200,000.00 x .80 = $160,000.00 new loan balance.
$160,000- 120,000.00 payoff of old mortgage = $40,000
$40,000 - 4000 closing costs for new loan = $36,000
$36000 - 2500 to reestablish escrows for taxes and insurance = $33,500 left for the purchase of the new acreage.


You may also want to check if you have a Farmers Home or Farm Credit Service in your area. They have loans for Farm and rural lot loans.  The last time I looked into those programs, (which was several years ago so call them for their current guidelines,) they required credit scores over 640 and they had strict guidelines for the analysis of debt-to-income ratios.  However, they had favorable rates and programs which might help you accomplish your financing goals, as they specialize in farm financing. Also, they had an interesting refinance program which allowed their borrowers to refinance to the lower prevailing rate with reduced fees.  Again, that was several years ago and I don't actively use their programs--but I would check with them. If you take your answers to all of the questions above, along with your own questions/concerns and talk with a Loan Officer, you should get really good information from them.

The other place I would inquire is a locally owned and operated bank.  I know where I am from, rural NW Ohio, the local bank can make loans that I as a Mortgage Banker cannot.  The reason for this is that they loan their depositors funds.  The Board of Directors for the bank is made up of local community leaders.  If they decide that a mortgage is a good business decision and investment, they will lend the money to the applicant.  It isn't based upon national underwriting guidelines like USDA or FHA.  So, if you have a bank like that in your area, you might also want to check with that organization.  

Finally, because currently there are not many buyers for unimproved land in most U.S.real estate markets, you may have an option for owner financing.  In other words, the owner of the land would actually allow you to make payments directly to him.  I have seen many versions of this type of financing, sometimes referred to as a land contract.  Basically, if you can strike a bargain with the seller for terms for the purchase and financing, you may not need an outside lender.  However, if you are going to consider this option talk to an Attorney who specializes in this type of transaction.  Along with helping you to negotiate a financing and purchase contract that protects your interests, he/she will also strongly suggest that you obtain an evaluation from a licensed real estate appraiser and that you have a title search and title insurance policy for the property in question.   

You have my best wishes for success!