How to Get the Best Deal on Farm Land Loan Rates

Sep 30, 2022 | Mortgage Guides

Financing a farm or ranch can be dispiriting. However, learning the basic information of farmland loans can simplify the process for future investments and provide a way for ranchers to access the funds they need through various products, services, and loan terms offered by both government organizations and private companies.

‍Whether you are looking to start up, expand, or maintain farmland, this guide covers everything you need to know to find the best deal on interest rates, borrowing from government organizations, and working with private companies to secure financial support for your farm business. Additionally, people can benefit from the available educational content, which explains payment eligibility and other vital information for potential customers.

What Is a Farm Loan?

Farm loans help with a farm’s purchase, operation, or expansion. Both government and commercial loan programs are available to finance these. The Farm Service Agency (FSA) of the United States Department of Agriculture (USDA) is an official government organization in the U.S. that offers multiple programs such as emergency loans, home programs, share program outreach, and FSA farm+ education. Meanwhile, many commercial companies and private lenders also provide financing for farmers and their businesses.

How Do Farm Loans Work

Funding a farm enterprise can originate from real estate loans, operating loans, lines of credit, equipment financing, and more. These loans can be used to buy a farm, cover cash needs for operations and maintenance, fund livestock, feed, seed, and equipment such as tractors, greenhouses, irrigation systems, and more. Each loan will have its terms and conditions, which means varying interest rates. In some cases, joint financing with other farmers may be beneficial for all parties involved.

Types of Farm Loan Programs

Various farm loans are available that serve different purposes. For example, some are ideal for short-term goals, such as financing the purchase of seed or livestock, while others are better for long-term plans, like ensuring the ranchers’ crop security. Following are seven loan models every farmer should know:

  • Operating loans: Cover the operation costs of a farm or ranch and its owner’s living expenses. Uses may include buying equipment, livestock, and seed.
  • Ownership loans: Finance the purchase or expansion of farmland. Examples of coverage include paying for closing costs, constructing new buildings, or utilizing methods for conserving soil and water resources.
  • Microloans: These can be operating or ownership loans reserved for new and non-traditional farmers with fewer underwriting requirements.
  • Youth loans: These loans are designated for individuals between the ages of 10 and 20 and help students who need financial assistance with agricultural projects. 
  • Emergency loans: Assist farmers in recovering their production and physical losses after experiencing a drought, flooding, or other natural disasters.
  • Targeted loan funding: Some FSA loan funds from the USDA are reserved to help minority and women farmers purchase and maintain a farm or ranch.
  • Native American tribal loans: Land loans devoted to those within Native American reservations and Alaskan native communities.

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Farm Land Loan Interest Rates

There are a few factors to consider when it comes to finding the best deal on a farm loan. First, examine the interest rate. This figure determines how much the farmer will repay and helps the company provide benefits to its customers.

If the interest rate is too high, the borrower may not be able to make the payments and could suffer a loss of their farm. On the other hand, if the interest rate is too low, the farmer may not earn enough to support their family.

What Are the Current Farmland Loan Rates?

With interest rates at an all-time low, now is a great time to finance a farm or ranch. Farmers can receive loans with low interest rates and long repayment periods, helping them secure their businesses and livelihoods. Both aspects help to save money and keep repayments low.‍

The average farmland loan rate in the United States is 4.21 percent. Lower rates are most often found with government-backed programs, but private lenders are known to offer competing rates. When seeking a loan, compare multiple providers’ interest rates and repayments. Shopping around will help you choose the best loan that fits your needs.

What Factors Affect Farmland Loan Rates?

Different aspects can affect the interest rate. The type of loan, the amount borrowed, and the current economic conditions are critical. These criteria for lenders are summed up into three parts:

  1. Risk: Lenders consider the risk of the borrower (credit history and farming experience) and the risk of the loan (size of the down payment and quality of the land).‍
  2. Aggregate risk: Interest rates may adjust based on how much gets borrowed. Rates tend to lower the more business there is. For example, buying farm equipment in bulk often results in a cheaper rate.‍
  3. Competition: Lenders want to be profitable, and long-term sustainability is vital for that to occur. As a result, they often charge high-risk individuals higher rates.

Farm Loan Qualifications

There are several aspects a borrower must meet to qualify for a farmland loan. These include everything from having prior farm experience to typical loan conditions like a good credit score. While each lender’s requirements differ, you can break down almost all farm loan prerequisites into three qualifications:

  • The property must be an eligible farm enterprise, meaning it cultivates, operates, or manages farmland for profit.
  • For ownership loans, borrowers must provide proof of established farm management experience, including the number of years.
  • General eligibility requirements include creditworthiness, down payment amount, proof of farm ownership, and more.

What Is the Maximum Loan Amount That can be borrowed?

The maximum a borrower can receive depends on the type of loan. For example, the maximum borrowed amounts for FSA loans are as follows:

  • Ownership loans: $600,000
  • Emergency loans: $500,000
  • Operating loans: $400,000
  • Beginning farmer loans: $300,150
  • Minority-targeted loans: $300,000
  • Micro loans: $50,000
  • Youth loans: $5,000

What Is the Minimum Loan Amount That Can Be Borrowed?

The minimum that farmers can borrow for a loan is $5,000. However, depending on the land’s size and value, the amount could be higher. For instance, if the farmland is large or located in an affluent area, it could be as high as $50,000.‍

Alas, some loans, such as FSA-endorsed micro-loans and youth loans, do not have set minimums. Commercial and private providers vary in their requirements on a lender-by-lender basis.

Land Loan Application Process

The process of acquiring a farmland loan is simple. The borrower must complete an application and submit it to the lender. The lender then determines whether or not the applicant meets eligibility.

If approved, the loan is disbursed to the borrower, who becomes responsible for repayment. By making payments over the loan’s term, the borrower will pay off the loan, plus interest, in full.

If the borrower defaults, the lender may decide to take legal action to recover the outstanding balance.

Farm Land Loan Repayment Terms

If you’re considering taking out a loan to purchase farmland, it’s essential to understand the repayment terms and conditions. Most loans require the borrower to make payments each month until the loan is paid off. If you can’t make payments, late fees accrue, and the loan could default.

Defaulting on a loan may have serious consequences, including damage to one’s credit score, and can result in declaring bankruptcy. If unsure whether you can afford a loan, it’s best to speak with a financial advisor to get a clear idea of what you can afford. They will help you understand all the costs associated with taking out a loan and create a budget that works for you.

Farm Land Loan Alternatives

There are a few other opportunities for financing farmland. Below, we will explore some of these options so you can make the best decision.

  • Personal loans: Finance large purchases such as a car, a house, or even farmland. Whatever the case, personal loans can finance a significant acquisition without putting much money down.
  • Home equity loans: Consider taking out some of your home equity. With the added benefit of being tax-deductible, a home equity loan can save you a lot of money over the life of the loan.
  • Peer-to-peer loans: Allow borrowers to borrow money from individuals instead of a financial institution. Such lending is attractive for borrowers looking to consolidate debt or finance a large purchase.

FSA-backed programs often offer the best farm loan rates. Commercial lending or utilizing one of these alternatives can be ideal if you cannot qualify for an FSA loan. To learn more about your options, you can visit an FSA service center or their official website, which displays their flag and logo.

To learn more about farmland loans, contact a Wesley Mortgage representative today and get the answers.

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