Does the property have to be 5 acres or less?
Wow, I wish I could answer this question in as few words as you asked it! Unfortunately, though, this is going to take a little longer.
Because if I had to answer it in just a couple words I would have to say, “it depends”.
We get this question often and so I will try to give you an answer that doesn’t get too lengthy but also covers enough to be meaningful.
No Maximum Acreage Defined by HUD
HUD does not have a magic number of acres that your property cannot exceed in order to be eligible for a reverse mortgage.
5 acres is a guideline many lenders have established but this is not a firm rule.
More so than the absolute size of the parcel, the heaviest consideration is given to the conformity to the other sales in the area (thereby demonstrating marketability), the use of the property (cannot be agricultural usage or more than 25% business) and the majority of the value should not be in the land.
The appraiser must find recent comparable sales as part of the appraisal process and your property must be similar to those sales.
If all the sales in the area are all 7 – 10 acres requiring the appraiser to make very little or no adjustment to your property that is also about the same size and the properties are not being used for agricultural purposes, then the size of the property is not a real issue.
If however, the other sales in the area are all on much larger or much smaller parcels and there are no sales of similar sized properties available, then any adjustments the appraiser makes to arrive at a value are completely subjective and not allowed by HUD.
Furthermore, not only is the value of a property that is a much different size not substantiated if there are no similar sized comparable sales available, the marketability of that property is not established.
If no homes on that sized parcels are selling, it could be because that sized parcel is not readily accepted by homebuyers in that market and HUD does not want to insure a loan on such a property making the property unacceptable for a reverse mortgage.
Ineligible Property Types
As I stated, HUD does not insure loans on commercial and agricultural properties.
We sometimes see a property that does not have a current crop in the ground, but it is zoned agricultural and its highest and best use is agricultural.
This would render a property ineligible. This would be true if the property was 5 acres or 25 acres so it’s not always just the size that counts.
Finally, we have had some borrowers who have done lot divisions and placed the reverse mortgage on the parcel with the dwelling after the division when it made sense.
There was one just recently where the lot was about 35 acres and the sales in the area were all less than 5 acres and the borrowers could not get a reverse mortgage.
They chose to do a lot split, making one parcel of 32 acres and one of 3 acres (the same size as most of the other homes in the area) and then do their reverse mortgage on the dwelling with 3 acres.
Before you run out and subdivide your parcel, I would caution you though.
There may be tax ramifications on the taxation of the new parcels, you need to be sure that the sales are available for other sized parcels and that it will not be an exercise in futility and expense and that it would not injure either of your parcels.
Before you do anything along this line, I would always suggest you get as much information as possible.
Make sure to check zoning laws
Check with the authority responsible for zoning, the taxing authority, a local surveyor, a real estate attorney and possibly even a knowledgeable real estate professional to determine the effect of the proposed actions on value.
Please forgive me for getting so long-winded but the truth of the matter is that the property being over 5 acres does make the loan a bit tougher and the appraisal will receive more scrutiny, but it does not mean that it is an automatic disqualifier.
The only way to be 100% certain is to have an appraisal done and see what sales are available in the area but there are many times we can look at the information available to us and get a feel for that availability.
If you already have an appraisal, please feel free to send us a copy and we will tell you what we see and that doesn’t cost you anything!
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