Will the Lender Underwrite That ‘Outbuilding?’

January 4, 2019

For many conventional lenders, rural properties are . . . different. It’s not unusual for a rural property to have more than one structure on the lot—an outbuilding—and to have its own septic system rather than be connected to the local sewer and water systems. 

To an extent, it’s because of property characteristics like these and the different underwriting expertise they require that many conventional home mortgage lenders don’t maintain a large presence in rural areas. 

That’s one reason why homebuyers rely heavily on mortgage loans backed by the federal Rural Housing Service, an agency within the U.S. Department of Agriculture. In some rural areas, virtually no home mortgage funding would be available at affordable pricing if the agency wasn’t there to make its loan products available to lenders. 

That’s why real estate agents and brokers scored such a big win just a few weeks ago when the federal government enacted a law that does several things to help keep mortgage money flowing to rural areas. 

First, the law—enacted as part of a giant farm bill that was one of the last pieces of legislation signed into law last year by President Donald Trump—keeps the definition of rural area at 35,000 people. The definition was set to change next year, and should that have happened, thousands of communities in all parts of the country would have no longer been eligible for Rural Housing Service loans. That means people buying their first home would have had to find a conventional lender willing to make a loan under terms they could afford. In some markets, those lenders simply aren’t there.

Fortunately, the law pushes back the change in the rural definition until the 2030 census. As a result, for at least the next 11 years, the areas that are eligible for RHS loans today will continue to be eligible for them.

Second, for rural areas that have a military base or federal prison as one of their local employers, there’s additional good news. The entire population of the base or prison will no longer count against the area’s population cap. Instead, only a portion of the population of those facilities will count against the cap, which means more areas will qualify for RHS loans. Prior to the change, the big boost in population that resulted from the facility's presence pushed many areas past the 35,000 population threshold. That’s no longer the case.

Both changes are detailed in the latest Voice for Real Estate news video from NAR.