In recent months, my K-Coe colleagues and I have seen a rash of rejections for residential mortgage loans among good, well-heeled farming clients.
Their applications for financing for a new home have been turned down because they don’t fit inside the typical box of mortgage lending.
Here’s why: Most newly originated mortgages head to the secondary mortgage market, where home loans and servicing rights are bought and sold between lenders and investors. Fannie Mae and Freddie Mac dominate this large market. These two federally backed agencies provide liquidity and guarantees to thousands of banks, savings and loans, and mortgage companies. In the U.S. today, most mortgages are “conforming loans” – those that meet the funding criteria of Fannie Mae and Freddie Mac.
Lenders prefer to deal with conforming loans, since they’re the only type the two federal agencies will guarantee and buy in the secondary mortgage market.
While conforming loans help make credit available to borrowers, their policy standards are written for the masses. They’re tailored for people with W-2 wages and relatively simple tax returns.
The typical farmer doesn’t fit those requirements. You’re likely to have more than one business entity or partner, multiple loans and complex tax returns. Your income looks very different from the typical American’s. Mortgage underwriters often have trouble figuring out how to fit your situation into conforming loan requirements. So, it’s easier for them to reject your residential mortgage application.
If this happens to you, consider these solutions:
1. Engage an aggressive mortgage broker who understands how farming finances work. You’ll need a broker who’s well-versed in working with self-employed applicants, especially those with multiple entities. Your broker should be prepared to work with your financial advisor, who will help explain your tax returns. Both specialists will serve as a tenacious liaison between your application and the loan underwriter. Without their help, it can be difficult even to contact an underwriter.
2. Use a private mortgage banker, especially if you’re buying a more expensive property. These lenders are better versed in dealing with complex borrower situations. Many large regional and national banks have private mortgage bankers on staff.
3. Find a lender who offers portfolio loans. A portfolio lender is a bank or other institution that originates mortgage loans and keeps the debt in a portfolio of loans. The loans are not sold in the secondary market. The advantage here is that you’ll be able to work directly with the institution that holds your loan. These lenders also have more decision-making flexibility. The drawback is that these loans tend to be more expensive. Not all banks offer portfolio loans, so you’ll have to do a little research online to find one in your region.
4. Seek out ag-focused lenders like Farm Credit and Farmer Mac that offer rural residential loans. They understand agriculture and its complex financial structures.
