Why mortgage lenders hate unique homes
Home is where the heart is, but if your heart lives in a structure made of recycled tires, be prepared to have a hard time getting financing. Before you commit to buying a quirky home, or refinancing the one you already own, know ahead of time what heartache you may run into.
A property doesn't have to be that "out there" to cause your mortgage underwriter to lift his eyebrows. From a lender's perspective, properties that count as unusual may include:
- Log homes
- Green homes
- Homes with odd floor plans
- Homes with excessive lot sizes
- Mixed-use properties
Why mortgage lenders don't love quirky homes
The unprecedented wave of foreclosures recently has taught mortgage lenders that being able to foreclose and resell a property in a timely fashion is as big a part of managing their mortgage portfolios these days as anything else.
Keeping this in mind, mortgage lenders have started evaluating properties with an eye toward resale price and potential time on the market if they have to foreclose. That's bad news for homeowners with unusual homes, or prospective buyers with their heart set on an unusual home on the market.
Homeowner Daniel Akst, who wrote in Metropolis magazine about his experience financing the construction of his custom modernist dwelling, summed it up this way: "Almost everyone borrows to buy or build a home, and the size of the mortgage you can pry out of a lender depends heavily on the appraised value of the place, which is the bank's collateral, after all. I am here to attest that unusual houses, no matter how wonderful, appraise for less."
Here are some unique home types and why it might be difficult to finance or refinance them:
Log home financing can be challenging, depending on the home and location. Log homes are unusual in many parts of the country, so appraisers may be unable to locate comparable sales near your property--and that will really hurt your case. Although log homes are expensive to build, if there are no similar homes nearby to compare, lenders are less inclined to give you credit for the extra expense and may knock down the appraised value for the purpose of a refinance.
Also, many mortgage lenders fail to discriminate between a custom-built log home and one assembled from a kit. The latter are often considered non-standard structures, which may disqualify you from refinancing altogether.
Those who make use of recycled or unusual materials when undertaking a green home renovation may find refinancing difficult in the future. As with log homes, comparable sales are critical in helping mortgage lenders decide whether and how much to lend. Special consideration must be given to properties that represent special or unique housing for the neighborhood. It's difficult to assess the value of a green home with an unusual design--a dome home, for instance--or a property that's off the grid and energy self-sufficient when those are still relatively rare.
Fannie Mae's guidance to lenders says, "On a case-by-case basis, lenders must determine whether there is sufficient information to develop a reliable opinion of market value."
Moreover, if you purchase energy-efficient improvements via a Property Assessed Clean Energy (PACE) program loan, you won't be able to refinance it or sell with a Fannie Mae or Freddie Mac loan unless you pay the home improvement loan off first.
Homes with odd floor plans
Dwellings with unusual layouts, peculiar floor plans or inadequate equipment or amenities are harder to sell. Examples of odd plans include homes where bedrooms are on a level with no bathrooms, or a kitchen on a different level from the dining room.
Fannie Mae's underwriting guidelines state that an atypical or functionally obsolete floor plan limits "the market appeal for the property in comparison to competitive properties in the neighborhood," and that the value of the property should be discounted accordingly.
Homes on huge lots
Homes with expansive lots are usually properties located in rural or undeveloped areas. These properties suffer from the same shortage or complete absence of truly comparable sales for the lender to use when determining the home's value.
Massive lots can be a problem if the entire neighborhood does not consist of homes on similar-sized properties. In addition, most lenders are leery of making a loan on a farm in the guise of a residential mortgage.
How big is too big? It depends--the lender will compare your lot size with those of your neighbors. If everyone is on one acre and you have 10, your appraised value may come in low for the purposes of refinancing, or you may be denied a home loan altogether.
Outbuildings may also be red flags for lenders, although a small barn might be okay if your neighbors have barns too. Bottom line: the appraiser must demonstrate that the buildings are typical of local residential properties on the market.
Mixed-use often means a property that is used both for residential and business purposes. For example, a property with a family shop downstairs and family living quarters upstairs would be considered a single, mixed-use property.
Mixed-use projects can be financed conventionally as long as the commercial portion of the development does not exceed 20 percent (for Fannie Mae guidelines) to 25 percent (for Freddie Mac guidelines) of the total space.
If you own such a mixed-use property and want to look into FHA loans for your refinance, the entire project must be FHA-approved. This is a relatively new requirement for refinancing eligibility.
How to find a home loan if you're "different"
Your best bet for financing an unusual property might be a lender that's well acquainted with your local area. Other possibilities include portfolio lenders, which are mortgage lenders that don't sell their loans to companies like Fannie Mae or Freddie Mac, or a lender that specializes in your sort of property. For example, there are many mortgage companies that specialize in financing log homes.
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