Why Most Private Lenders Don’t Consider Rural Areas
The reason that most private lenders won’t consider a rural property really comes down to the worst case scenario, which is a default by the borrower that leads to a foreclose and eventually having to take back the property. Most lenders that end up owning a foreclosed property will immediately try to sell the property to recoup their loss. Rural properties have fewer potential buyers than urban areas, so it could take a long time to sell. Meanwhile, the lender will incur a lot of costs to hold and manage the property.
If the lender had to visit the property, that could take a lot of extra travel time. If the property needs to be renovated before going on the market for sale, it may be challenging to find contractors that are willing to drive to the rural area. All the cost to manage the asset prior to the sale could be higher than it would be in an urban area. All of these factors means a loan secured by a rural property bears a greater risk for private lenders.
Guidelines for Rural Property Private Mortgages
Although the general rule is that private lenders won’t consider rural locations, there are some exceptions. Typically the lenders that do consider rural properties are ones that only lend in one state or a region covering a few select states. Rural property loans typically have higher interest rates and more conservative loan-to-values than loans secured by urban properties.
If a lender’s maximum loan-to-value is 65% for most of their loans, the maximum would likely be 50% LTV for rural properties. In a declining real estate market or a recession, the maximum LTV could be lower, say 30% to 40% of the appraised value.
In addition to the lower loan-to-value, a real estate investor with a rural property will likely have to pay a higher interest rate and fees. A lender that typically charges 10% interest for most loans will likely go up to 12% for rural properties. And if their origination fee is typically 2% for most deals, they may increase that to 3% or 4% for a rural property loan.
Although private mortgages are generally qualified based on equity in the subject property, lenders considering a rural property loan may dig deep into the borrower’s finances by looking at tax returns and verifying income.
Lenders may also want to put a lien on other properties owned by the borrower. In some states, lenders can take a 2nd position lien on the additional collateral instead of refinancing the 1st mortgage, provided there is enough equity in the property. The idea with the additional collateral is the borrower would be less willing to default on the loan if they are at risk of losing more than just the rural property.
Exit Strategy for Rural Property Loans
As with most private mortgages, the exit strategy is one of the most important factors for lenders to determine if they’d consider a rural property. Private mortgages are short-term loans, and all lenders will want to know how the loan will be paid off.
Will the subject property be sold? Do you plan to refinance into a long-term conventional loan? If so, will you qualify for that conventional loan before the end of the loan term?
If you don’t have a clear exit strategy, it may be even more difficult to get financing for a rural property.
How Private Lenders Define Rural
Each private lender has their own way of defining whether a property is rural. Some use the location’s population density per square mile. Private lending companies that lend nationally may use the US Census or Department of Agriculture guidelines.
Most lenders take a simple approach of looking at the property on a map to determine whether they consider the property to be urban, suburban or rural. Many times the entire city or town is rural because it’s far away from the greater metropolitan area. However, some large cities like Los Angeles or Dallas have rural areas within the city limits which many lenders will not consider. On the other hand, a rural area may be a popular vacation spot which many lenders will consider.
How to Find Rural Private Lenders
If you’re ready to search for a rural property lender, use our website PrivateLenderLink.com as a resource. All the private lending companies listed on the site have a very detailed profile that shows their lending guidelines, and you can contact each lender directly. There are two options for using our platform.
Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly by email, phone call, or visit their websites. First select a loan type, then enter the state or metro area where the property is located.
Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.