While millions of Americans choose to live in urban and suburban communities with the convenience of nearby amenities, many prefer the quiet and space of life in small towns or rural areas. Homes well outside of urban/suburban neighborhoods may often be unique, and financing them can challenge mortgage lenders and residential appraisers to determine an opinion of market value in accordance with Fannie Mae’s guidelines.
Fannie Mae purchases loans secured by properties in all neighborhoods and all areas – as long as the property is acceptable as security for the mortgage based on its value and marketability. Fannie Mae encourages greater participation by small lenders and rural lenders in the mortgage lending process.
Over the years, misconceptions have emerged about Fannie Mae’s requirements for appraisals of homes in small towns and rural areas, even suggesting that they are not eligible for a conventional mortgage. But the fact is, just because such properties are a little off the beaten path, literally and figuratively, doesn’t mean Fannie Mae can’t help lenders finance them. Even unusual styles, such as log homes, geodesic dome homes, or earth-berm homes can qualify for Fannie Mae financing.
Fannie Mae offers mortgage products and establishes eligibility guidelines that are designed to provide mortgage finance opportunities in all market segments. Fannie Mae will purchase mortgages in small towns and rural areas provided the properties that serve as collateral are primarily residential in nature and use, and if all other Fannie Mae requirements and conditions concerning property eligibility have been met. The property may have acreage and/or outbuildings, but primary use of the property as a residence is a key factor.
Example 1: Residence and Outbuildings
Your buyers plan to purchase a 20-acre rural property with a house, small apple orchard, produce stand, and barn, and use it as their primary residence. The sellers occupy the property as their principal residence, and in season, they sell fruit and vegetables on weekends. The appraiser determined that the site was typical for the market area, and that the house represented the site’s highest and best use.
Is a mortgage loan secured by this property acceptable for sale to Fannie Mae? Yes! The loan is acceptable because it meets our standards as a primarily residential property. Even though the property looked agricultural, the appraiser determined that the produce stand, barn, and agricultural activity represented a minor secondary activity.
Example 2: No Recent Nearby Comparable Sales
Your buyers have selected a rural property that appears to meet Fannie Mae’s eligibility guidelines, but the area hasn’t had many sales nearby and the appraiser can only find comparables a few miles away.
It is acceptable to use comparable sales that are located a considerable distance from the subject, as long as they represent the best indicator of value. Fannie Mae recognizes the challenge in rural areas, and does not have a distance limitation for the selection of appropriate comparable sales. Appraisers must use their knowledge of the area and apply good judgment when selecting comparable sales. They must also provide an explanation in the appraisal report about why they selected the particular comparable sales that were utilized. Note, however, that it is not acceptable to ignore closer comparable sales just to arrive at a particular value conclusion. Following these guidelines, you can say “yes!”
Appraiser Selection Is Key
Fannie Mae recently issued Lender Letter LL-2014-02, Property and Appraisal Requirements for Properties Located in Small Towns and Rural Areas, to provide clarifications and reminders regarding our guidelines. We recognize that lenders making loans secured by properties located in small towns and rural areas are often faced with challenges that are not found in suburban and urban locations. Residential properties often have characteristics that present difficulties for appraisers, such as unique building types, substantial distances between properties, large lot sizes that may include farmland, and non-public sources for various utilities. General lack of density and homogeneity demand reliance on appraisers with expertise and experience in these markets. Qualified appraisers who understand the characteristics of these markets are key to ensuring compliance with Fannie Mae property eligibility and appraisal requirements.
Lenders are free to select appraisers for any appraisal assignment. A common misconception is that lenders must use a third-party vendor such as an appraisal management company, but in fact there are several options for appraisal management along with additional flexibilities for smaller lenders. (Refer to Lender Letter LL-2014-02 for details.)
Having an appraisal completed by a qualified appraiser with the requisite knowledge, expertise, and experience for the specific assignment type and market area can help the lender feel confident that the property meets Fannie Mae’s collateral guidelines. For small town and rural properties, appraisers that possess market knowledge and experience in more rural geographic areas should produce credible results that will enable lenders to make appropriate collateral evaluations and underwriting decisions.
Financing Small Town And Rural Homes
Armed with the accurate information and qualified appraisers, small town and rural community credit unions can help your customers finance their dream of country living, and Fannie Mae is here to help. For more detailed information, refer to the recorded tutorial “Appraising Rural Properties”.