We all know that the location can affect the price of your home (after all, just look at the housing markets in Toronto and Moncton for a comparison of two extremes). But does location ever affect the kind of mortgage that you get? Some home buyers may be surprised to know that it does.
Location matters for a number of reasons. Often, a property’s land is more valuable than the building that sits on it, which affects appraisal value. When a lender is assessing a mortgage application, they want to know whether or not they can get a good return on their investment. In most cases, if you’re a qualified borrower, they’re going to get a good return because you’re paying – and can afford to pay – interest. But the lender also wants to know that the property is worth the price that you’ve agreed to pay for it, which is why an appraisal is such an important factor in the process. And although certain features inside the home may come into play, as well as the age and condition of the property’s operating systems, a bigger portion of the appraisal pie is the value of the land itself, so location is often a big factor when it comes to price.
Real estate agents love to throw about the phrase, ‘Location, location, location’ when showing prospective buyers around to properties – and they’re right. Prospective home buyers tend to have very strong feelings about the proximity of their home to certain amenities
, whether that means being as close as possible to work, family, schools, restaurants, shopping, and or as far away from roads, cities, or electricity towers as possible. After price, location is often the most important factor for people looking for a home.
One of the most common circumstances when location comes into play is when a borrower is buying a recreational property, like a cottage. If the home isn’t a primary residence, then you may have to put a larger amount of money down toward the purchase, often upwards of 20 per cent. As a non-primary residence, it’s a riskier loan for the lender because, much like a second mortgage, the thinking is that if you, the borrower, get into financial trouble, you will work to keep the mortgage on your primary residence first, leaving the lender with the mortgage on the second property. This is particularly important if the property isn’t able to be insured.
Because the lender will be on the hook for your mortgage, they need to be able to sell the property and recoup the money on it. And although lenders can and will instigate foreclosure proceedings, they’re not in the business of selling homes, which means that they aren’t experts at it, nor do they want to spend the time, energy and resources necessary to market a particular property. They like to see a property that will, as the saying goes, sell itself. Location is much more important in this case than it is in other cases, especially when it comes to things like accessibility and access. A property that’s very remote may have a tougher time getting financing than one that’s 10 minutes off the highway. If a property isn’t winterized and is only liveable for several months out of the year, that could be another factor. Is the road to the property paved or not? Is there even a road or it is only accessible via boat? The same things that may worry you when it comes to location and access when buying a recreation property are the same things that could prevent you from getting a mortgage. While you may be able to overlook certain hassles in order to buy the cottage of your dreams, your lender won’t be as sentimental.
In most instances, buying a home in a flood zone isn’t a deal-breaker for your mortgage lender, and probably not even for your mortgage insurer, if you’re getting mortgage insurance. Even though it may affect their ability to resell the home if you end up defaulting on the loan, there are insurance products that will mitigate that risk. In addition to water damage covered by most home insurance policies, certain insurers also offer specific flood insurance, which may be looking into if you’re in a flood zone, or even if you live near a river and/or are below ground level/sea level. But lenders will almost always require you to have home insurance, and getting that insurance can be more difficult and/or expensive if you are in a flood zone. And if you can’t get home insurance, or can’t afford to pay the premiums for it, then getting a mortgage could become a problem.
When it comes to private lending, most borrowers aren’t ideal candidates for the best loans – if they were, they’d go to the banks and other lenders that offer lower interest rates. Private lenders know this, and as such, they don’t hold the borrowers to the same standards as other lenders, such as banks and lenders that specialize in so-called ‘A deals’, would. Instead, they assess the property to be bought just as closely as the borrower, and in many cases, even more so. This way, if the borrower defaults on the loan, they have a recourse in being able to sell the property. The primary focus for standard mortgages is to assess the borrower’s ability to repay the mortgage lender, while private lenders assess the property’s ability to pay for itself. So if you have to resort to a private lender to get a mortgage because you have less-than-stellar credit, know that location is going to play into the equation much more than it would otherwise.
Given the parameters for location that can affect a mortgage, rural property can face an uphill battle when it comes to getting approved, depending on the type of lender and type of mortgage that the borrower is looking for. There’s automatically a larger pool of potential buyers for a property that’s located within a densely populated area than there is for a rural property, so that’s a negative for lenders, who would prefer to unload the property quickly if they have to do so.
There could also be a potential issue when it comes to getting a mortgage for a rural property because properly appraising its value can be difficult. Buildings on the property may or may not be allowed to be included in the estimated market value, which can mean that it doesn’t appraise for what you’d need to buy the property.
Location obviously matters when it comes to your lifestyle, but depending on your needs and what mortgages are available to you when you’re ready to purchase, pay attention to how it an affect your financing options as well.
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