Why rural properties are so much harder to finance

[Clayton Silva]

Every element of a mortgage is a risk calculation to the bank.  Leverage, FICO, income vs no income, more documentation vs less documentation, appraised value, duration of loan, etc. are all risk factors that banks consider when making the decision to issue a mortgage.  Rural properties are uniquely difficult because one of the most critical elements of residential mortgage risk calculations is the appraisal.  In order for a bank to feel comfortable with the value of the property, they have to get an appraisal and in order to get one, there have to be recent sales comps in the nearby area.  Because rural areas are inherently low density, there are fewer sales comparables for an appraiser to use to justify value.  This will always make banks more hesitant to issue a mortgage.  

DSCR rural properties are even more difficult because you are adding an additional layer of risk by reducing the amount of income documentation for ATR (ability to repay) which further poses risk to the bank. This is why a lot of folks I work with get frustrated by lower LTVs, or higher rates, with rural properties simply because the bank is hedging for additional risk.

Some shops like ours can still get them done, but always with the preface that it will often involve more work than other similarly structured DSCR loans, but I wanted to share this as a PSA for folks.

Many people reach out to me for STR, DSCR, rural loans and now you have added 3 compounding risk factors in the banks eyes so in order to overcome this determination of risk, it is imperative to have the following if you want to have any success securing financing for your next adventure AirBNB:

1) bullet proof credit score

2) very healthy reserves

3) experience is almost a requirement now for these types of scenarios but at a bare minimum, you have to have owned your primary or have extremely well documented housing expenses.

Hope this helps people understand a bit more about why these are trickier than normal.

Cheers!

[Erik Estrada]

Quote from @Clayton Silva:

Every element of a mortgage is a risk calculation to the bank.  Leverage, FICO, income vs no income, more documentation vs less documentation, appraised value, duration of loan, etc. are all risk factors that banks consider when making the decision to issue a mortgage.  Rural properties are uniquely difficult because one of the most critical elements of residential mortgage risk calculations is the appraisal.  In order for a bank to feel comfortable with the value of the property, they have to get an appraisal and in order to get one, there have to be recent sales comps in the nearby area.  Because rural areas are inherently low density, there are fewer sales comparables for an appraiser to use to justify value.  This will always make banks more hesitant to issue a mortgage.  

DSCR rural properties are even more difficult because you are adding an additional layer of risk by reducing the amount of income documentation for ATR (ability to repay) which further poses risk to the bank. This is why a lot of folks I work with get frustrated by lower LTVs, or higher rates, with rural properties simply because the bank is hedging for additional risk.

Some shops like ours can still get them done, but always with the preface that it will often involve more work than other similarly structured DSCR loans, but I wanted to share this as a PSA for folks.

Many people reach out to me for STR, DSCR, rural loans and now you have added 3 compounding risk factors in the banks eyes so in order to overcome this determination of risk, it is imperative to have the following if you want to have any success securing financing for your next adventure AirBNB:

1) bullet proof credit score

2) very healthy reserves

3) experience is almost a requirement now for these types of scenarios but at a bare minimum, you have to have owned your primary or have extremely well documented housing expenses.

Hope this helps people understand a bit more about why these are trickier than normal.

Cheers!

 Very solid post! 

I might add that it truly depends on the lender you work with. There are some lenders that don't really care if the property is in a rural area, and still be able to finance at a higher LTV. But like you mentioned on your post, reserves, credit, and experience are all important factors when financing these property types