You’ve found the perfect farm or farmland to make your dream a reality. To successfully finance your farm you must shop for lenders, compare loan terms and rates, and determine the amount of money required for a down payment. Next, gather your records and prepare documents for the loan application.
“How to buy a farm” kicks off a 2-part series based on my experience as a young farmer financing her first farm.
Shop for lenders
In 1916, the Land Bank System, modern Farm Credit, was established to provide farmers with access to credit to start and expand farms. In recent years traditional lenders have begun to offer farm loan products. Today there are dozens of lenders that offer credit to farmers.
Whether you choose an Ag lender or traditional lender, it is important that the lender has a good understanding of farm economics and your unique operation. Ag lenders boast expertise, but don’t dismiss traditional lenders. Many rural community banks are knowledgeable of the ins and outs of farming and eager to work with farm operators. Shop several lenders to find the best fit for your farm.
Compare loan terms and rates
Lenders offer several types of loans to fit farmers’ needs including loans for real estate, raw land, equipment, operating and general business. Loan terms range between 5-30 years maturity. Interest rates may be fixed or variable, and fluctuate depending on market conditions. Individual banks raise or lower their interest rates according to supply and demand.
A comparison of two major lenders interest rates on a 30-year fixed rate farm real estate loan varied by .5 percent. On a $200,000 loan, the difference between a 4.0 percent interest rate and a 4.5 percent interest rate is about $60 a month- $21,400.00 over the life of the loan! Compare loan terms and rates to get the best deal. Farmloans.com has a free comparison tool.
Agricultural loans often require more money down than traditional mortgages and lines of credit. As much as 30 percent down may be required. 30 percent on a $200,000 loan requires a $60,000 down payment. Large down payments are a huge hurdle for young farmers with lean start-up budgets. The Farm Service Agency (FSA) offers a solution. The Direct Farm Ownership Down Payment Loan reduces the down payment to 5 percent for eligible farmers and ranchers. Learn more at the Farm Service Agency website.
Records and documentation
Lenders typically require three years of financial and production history, and three years of financial and production projections. Also be prepared to provide copies of the last three years of your personal and farm income taxes. Beginning farmers with no historical data will be asked to provide personal financial records.
If you are already farming, the lender will ask for your farm’s income statement and balance sheet. When the time came to apply for my first agricultural loan, I had none of the financial documents required. I sought help from my local Small Business Development Center (SBDC). A counselor reviewed my records and helped me draft financial documents. Locate the nearest SBDC on The Ohio Development Services Agency website.
How to buy a farm II proposes alternatives ways young farmers can access land, and tells how formal agreements benefit both farmers and landowners.