You have found the perfect farm or farmland to make your dream come true. To successfully finance your farm, you need to research lenders, compare loan terms and rates, and determine the amount of money required for a down payment. Then gather your records and prepare the documents for the loan application.
“How to Buy a Farm” launches a two-part series based on my experience as a young farmer financing her first farm.
Shop for Lenders
In 1916, the land bank system, modern agricultural credit, was established to provide farmers with access to credit to start and expand their farms. In recent years, traditional lenders have started to offer farm credit products. Today there are dozens of lenders who offer loans to farmers.
Whether you choose a farm lender or a traditional lender, it’s important that the lender has a good understanding of farm economics and your unique operation. Agricultural lenders claim expertise, but do not reject traditional lenders. Many rural community banks know the ins and outs of farming and are keen to work with farmers. Shop multiple lenders to find the one that’s best for your farm.
Compare loan terms and rates
Lenders offer several types of loans to meet the needs of farmers, including loans for real estate, raw land, equipment, operations and general business. The duration of the loans varies between 5 and 30 years. Interest rates can be fixed or variable and fluctuate based on market conditions. Individual banks raise or lower their interest rates based on supply and demand.
A comparison of the interest rates of two major lenders on a 30-year fixed-rate farm home loan ranged by 0.5 percent. On a $ 200,000 loan, the difference between an interest rate of 4.0% and an interest rate of 4.5% is approximately $ 60 per month – $ 21,400.00 over the term of the loan. ready ! Compare loan terms and rates to get the best deal. Farmloans.com has a free comparison tool.
Farm loans often require more money than traditional mortgages and lines of credit. Up to 30 percent down may be required. 30 percent on a $ 200,000 loan requires a down payment of $ 60,000. Large down payments are a big hurdle for young farmers with lean start-up budgets. The Farm Service Agency (FSA) offers a solution. The direct down payment to agricultural property reduces the down payment to 5 percent for eligible farmers and ranchers. Learn more at the agricultural services agency website.
Records and documents
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 your last three years of personal and farm income tax. Beginning farmers without historical data will be asked to provide personal financial records.
If you are already a farmer, the lender will ask you for the income statement and the balance sheet of your farm. When I applied for my first farm loan, I did not have any of the required financial documents. I turned to my local Small Business Development Center (SBDC) for help. An advisor reviewed my files and helped me write financial documents. Locate the nearest SBDC on The Ohio Development Services Agency website.
How to buy a farm II suggests alternative ways for young farmers to access land and explains how formal agreements benefit both farmers and landowners.
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