Wednesday, November 14, 2012 - Article by: DOUG CAPPS - Guaranty Bank and Trust Co -
On October 18, 2012, USDA announced some new guideline changes regarding "Outbuildings and Property Eligibility" that you should be aware of.
"New Things You Should Know About USDA"
(1) Site and Building Requirements -
a. Farm related property cannot be acquired under this program. Vacant land or properties used primarily for agricultural, farming, farm operations or commercial enterprises are ineligible.
o USDA considers a farm service building to be any of the structures used in farming operations such as livestock barns and shelters; machinery-and farm supply-storage buildings; buildings and facilities for crop storage, including fodder; and special-purpose structures such as grain silos.
o Properties accompanied by a farm service structure require further analysis to determine property eligibility.
b. Functional Farm Service Structures -
o A farm service structure is considered to be functional when it can be used for its intended designed purpose without significant repair.
o As one example, a barn structure is typically designed to house livestock and feed. If a barn can be used for this purpose without significant repair, regardless of the applicant's intended use for the structure, then it is considered a functional farm service structure.
o Rural "non-farm" tracts often contain farm service outbuildings such as barns, and machine sheds that may have some functionality, however the tract of land is not income producing and is typical for residential properties in the area. USDA may approve the purchase of a site with a functional farm service building if the site is not income producing.
o The value of the functional farm service structure must be deducted from the appraised value.
c. Non-Functional Farm Service Structures -
o If the farm service structure cannot be used to meet its intended design purpose without significant repair, the presence of the structure does not disqualify the property from consideration.
o For example, a dilapidated barn in need of significant repair that may have once been used to house livestock and feed, is not considered a functional farm service structure.
(2) Land Limitations -
o Generally, the value of the site must not exceed 30% of the total value of the property. If the site exceeds 30% of the total value, then two additional tests must be met to ensure the property is eligible: (1) The value of the site must be typical for the area, as evidenced by the appraisal, and (2) The parcel cannot be subdivided into two or more sites.
o USDA does not support imposing limitations on the area of land associated with the dwelling purchase and cannot impose arbitrary acreage limitations, such as 2 acres, 10 acres, 15 acres etc.
(3) Property Limitations -
o USDA prohibits, "Purchase or improvement of income-producing land, or buildings to be used principally for income-producing purposes, or buildings not essential for RH (Rural Housing) purposes, or to buy or build buildings which are largely or in part specifically designed to accommodate a business or income-producing enterprise."
o USDA considers the following as "buildings not essential" for RH purposes: mother-in-law wings or attached/detached apartments
(4) Additional Reminders -
a. In-ground pools - In-ground pools cannot have any contributory value to the appraisal. Any value given to the pool must be reduced from the total appraised value.
b. Financing closing costs - USDA allows the borrower to finance closing costs into the loan using any available equity. For example, if the purchase price was $150,000.00 and the property appraised for $155,000.00, that would give the borrower $5,000.00 that could be used toward their closing costs.
c. Owning another property - There are certain circumstances were a borrower can own another property and still qualify for a USDA loan:
o Current property located outside the local commuting area,
o Current property insufficient for the family size - for example, a family of four living in a two bedroom house,
o Inadequate housing - USDA considers this to be a manufactured home not attached to a permanent foundation.
For more information please contact DOUG CAPPS at (662) 429-5100 ext. 105. NMLS ID #68160.
Fairway Independent Mortgage Corporation, 224 West Commerce St, Hernando, MS 38632 is a "MS and TN Licensed Mortgage Company." NMLS ID #2289. An Equal Housing Lender. All loans are subject to credit approval and compliance with investor guidelines.
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