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One of the most overlooked yet important factors in DSCR Loan eligibility is whether the subject property is located in a rural, suburban, or urban market. While it might seem like a simple classification, rural designation can significantly affect eligibility, pricing, and underwriting requirements, and policies vary widely from lender to lender.
The reason DSCR Lenders view rural properties differently boils down to risk, liquidity, and resale value. In rural areas, population density is lower, which means lower natural property demand, economic activity is often limited, with fewer jobs and rental drivers, and most importantly but typically least understood, there is abundant available land, making supply expansion (i.e. more competing properties built) easy if demand ever increases.
This creates a risk profile where both resale and rentability are less predictable. Real estate investors should understand that while rural assets can generate strong cash flow, they are often viewed by DSCR Lenders as riskier collateral.
In spite of this, rural markets can offer attractive investment opportunities, especially for experienced investors in vacation destinations (e.g., mountain towns, coastal villages, lakeside STR markets) where seasonal demand drives pricing. In fact, many of the most profitable short-term rental (STR) markets in the U.S. are located in rural or semi-rural areas.
There are several nuances and sources of confusion regarding rural properties and eligibility for DSCR Loans. Investing in rural markets can offer real estate investors some of the biggest returns, as competition can be low and smaller markets, especially vacation markets, can be extremely lucrative. However, properties in rural markets come with outsized risks as well, and appetite for financing properties in rural America can differ widely among DSCR Lenders. Some particularly conservative lenders, probably around half of all lenders offering DSCR Loans, will not provide DSCR Loans at all for properties in rural markets. Another portion of lenders will offer DSCR Loans for rural properties, but with significant restrictions, primarily around leverage (i.e. maximum LTVs) but also potentially additional restrictions and higher rates too. A small subset of DSCR Lenders have few to no restrictions on rural properties, however, these are rare, and the qualification process for securing a DSCR Loan on a rural property will likely still come with some extra scrutiny.
For DSCR Lenders that allow rural properties, the biggest difference between securing a DSCR Loan for a rural property and a property in a suburban or urban market is likely leverage restrictions. While it can vary from lender to lender, typical program restrictions for Rural DSCR Loans are a maximum LTV ratio of 65.0%, across loan purposes (i.e. acquisitions, rate-term refinances and cash-out refinances). Some lenders may offer higher LTV ratios for acquisitions only for example, at 70.0% for investors purchasing properties in rural markets, but 65.0% LTV maximums are more common.
Additional restrictions for DSCR Loans secured by rural properties may also include higher qualifying credit scores or DSCR ratios as well as property type restrictions (i.e. only allowing loans for SFRs in rural markets, with no condo units or even 2–4-unit properties allowed). Additionally, the interest rate and fees may be slightly higher on DSCR Loans for properties in rural markets. Overall, however, most DSCR Lenders that offer loans on rural properties will more likely than not just utilize a lower LTV maximum for Rural DSCR Loans, without any other additional restrictions or different pricing.
There is no universal definition of “rural” in DSCR lending. Each lender uses their own methodology, but the most common approach is to rely on the appraisal, specifically, the “Neighborhood Characteristics” section. In this section, the appraiser must classify the property as Urban, Suburban, or Rural. This checkbox often determines whether the loan is treated as a rural property. However, this approach presents several challenges since appraisers are given very broad discretion to decide what qualifies as “rural.” Conventional guidance (such as from Fannie Mae) intentionally leaves the classification vague to accommodate regional variation. Indeed, in a “lender letter” (guidance to lenders), Fannie Mae openly said that “guidance for small towns and rural areas has been intentionally broad to accommodate the diversity of the market segment.”
When DSCR Lenders rely on the appraiser for rural classification, investors (i.e. the borrowers on DSCR Loans) often don’t learn the rural classification until late in the process, when the appraisal has been finalized and received, usually weeks after the application and near the planned closing date. This can create huge problems and frustrations since if the “appraisal comes back rural” (i.e. appraiser uses personal judgment to check the rural box), then there can be many negative consequences. Many DSCR Lenders treat rural properties as fully ineligible for DSCR Loans. Of the lenders that don’t, and will still provide DSCR Loans for rural properties (probably around half of DSCR Lenders), these loans will often come with harsh restrictions, typically LTV maximums of 65.0% or 70.0% (versus 75.0% or 80.0% otherwise) and sometimes even higher rates and fees as well!
Thus, investors may be deep in the DSCR Loan process and thinking they are qualified at a certain leverage point and with certain rates and terms, and then be met with either ineligibility or significantly lowered loan proceeds due to a single appraiser’s opinion. While this is bad enough, the appraisal report is often received after the potential borrower has spent significant time (providing documents, lining up insurance, tracking down info, etc.) and expense (paying for the appraisal, option period or earnest money deposits) for the DSCR Loan. A rural classification from an appraiser, especially since this determination is hard to predict as there is no clear methodology for appraisers to use, that materially alters loan terms or even outright kills a deal, after significant time and money spent, is a huge historical headache and frustration point for many investors when it comes to DSCR Loans.
To address these problems, some DSCR Lenders have begun adopting alternative approaches for determining if a property is classified as rural, most notably, USDA rural designation maps. These maps allow lenders and investors to check upfront whether a property is classified as rural, which is a key difference maker. If the property’s classification can be determined at the application stage, then the eligibility can be determined before any significant time and money is spent, and there are no negative “surprises” down the line, not just for eligibility but in terms of leverage, loan terms and pricing.
While this rural classification methodology appears to be a huge plus for investors using DSCR Loans, it hasn’t been a perfect solution in practice. These USDA maps were not designed for mortgage lending purposes and may classify properties based on infrastructure access, municipal boundaries, or administrative data that doesn’t always align with real estate investing and common sense. Additionally, the maps themselves could be updated at unforeseen or unpredictable times.
Finally, investors who plan around a rural designation upfront in the process through the USDA map may be more likely to demand better terms or switch to a new lender if the appraisal comes back as suburban or urban. This has led DSCR Lenders to be hesitant about alternatives to the USDA map-based approach, since it may lead them to be considered “backup plan” lenders or be put in position to give more favorable terms to keep deals on such properties.
There are even more factors some DSCR Lenders use to determine rural classification, including rules around distance of comparable properties in the appraisal (i.e. all three top comparable properties must be within five miles of the subject property), the acreage of the property (any property above certain acreage limits is automatically considered rural) and even if the property is located on a gravel road. Thankfully, most DSCR Lenders are moving away from these arbitrary and confusing sets of rules toward more standardization, but these additional factors can still be present among DSCR Lenders.
Regardless of all the complications of DSCR Lender classification of rural properties, openness and adaptability to emerging investor issues such as the inherent problems of appraiser-classification of the rural (or not rural) nature of properties should be viewed by investors favorably, as it’s another example of how DSCR Loans can more quickly and more flexibly adapt to investor needs in the marketplace. If considering rural properties, or properties that even have an outside chance at being deemed rural, smart investors should learn their DSCR Lender’s policies and methodologies upfront, and have plans in place to have a solution regardless of the appraiser’s determination.
Acreage limitations for DSCR Loans are a separate (but related) issue from rural classification. While some DSCR Lenders have acreage rules tied up with rural rules, most lenders will have distinct acreage maximums for property eligibility. Generally, DSCR Lenders will vary among the maximum acres allowed for a property, but will pretty much always have a maximum acreage for eligibility. Acreage maximums for DSCR Loans typically will be between 2 acres maximum on the low end and up to 20 acres on the high end. Maximum acreage limits within this range are also common, with many DSCR Lenders having acreage maximums of 5 acres or 10 acres. If considering a property with a lot of acreage and land, it’s smart to confirm lender limits and maximums early on in the process. If seeking a DSCR Loan for a property with a lot of acreage, it may take some searching, but there should be options for rural properties on large acre plots with some digging.
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