Calculating Borrowing Capacity

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From house hunting to financing, first-time homebuyers often have many questions about navigating the road to homeownership. It’s an undertaking that can seem even more overwhelming when moving to a farm, acreage or rural community.

Farm Credit Services of America (FCSAmerica) consumer lending officer, Kim Ledger, shares five tips on how your clients can successfully finance a country home that fits both their lifestyle and budget.

 

1.     Start the conversation early

Before falling in love with a property, Ledger advises homebuyers to evaluate their financial situation and explore their mortgage options. 

“The first mistake homebuyers often make is not meeting with a lender prior to going out and shopping for their home,” says Ledger. “Involving a lender early in the homebuying process allows them to determine what property price range their income qualifies them for.”

 

2.     Gather up-to-date financial records

To complete a loan application, FCSAmerica requires the past two years’ tax returns, a most recent paystub and an updated balance sheet.

Ledger says it’s important for homebuyers to account for all assets and liabilities when preparing their balance sheet. “Listing liabilities is the easy part, but many applicants tend to overlook their assets such as a car or checking account.”

“Understanding the basics of how to fill out a loan application can reveal how debt-to-income ratios impact a homebuyer’s ability to borrow,” Ledger adds.

 

3.     Avoid overextending finances

Ledger cautions homebuyers against borrowing the maximum amount possible.

“We don’t want to set up our borrowers to fail, we want to set them up to buy their dream home and still be successful. For example, making their loan payments and having the flexibility to take on an unexpected car payment or being able to go out for pizza on Friday night.”

As a general rule of thumb, Ledger recommends the 28/36 standard which states a household should spend a maximum of 28 percent of its gross monthly income on total housing expenses and no more than 36 percent on total debt.   

“Following this industry guideline is a great way for homebuyers to calculate what they can comfortably afford without crossing their borrowing limit,” Ledger says.       

 

4.     Consider the size of the property

According to Ledger, some lenders are hesitant to offer financing for farms and acreages they define as nonconforming properties. FCSAmerica, however, can finance any sized lot.

“Large properties over 40 acres sometimes require a higher down payment and shorter loan term. We treat a property under that threshold as a traditional home loan product. There is a lot of flexibility under the FCSAmerica umbrella.”

 

5.     Seek out the right lender

Lenders stand out from the competition by the areas they specialize in.

In addition to accepting rural acreages that don’t always conform to traditional financing, Ledger says another FCSAmerica niche includes self-employed homebuyers. 

“We understand the unique financial situations of the self-employed market, including farmers, and have the expertise to use trends and averages to get approvals. Our years of experience financing rural properties is definitely an advantage as well.” 

Are your clients ready to start their rural property search? Refer them to the lenders who know the country.

Click here for more information about rural home and acreage mortgages.

Iowa Association of REALTORS

This article was written as a collaboration of IAR Staff members or invited subject matter experts.