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Loans for New Farmers
Obtaining a loan is never easy for beginning farmers, but programs available through the federal Farm Service Agency may make it less challenging. The Farm Service Agency (FSA) is a combination of agencies, one of which had its purpose providing credit to lower income, lower equity beginning farmers unable to get a loan elsewhere. This is now one of the primary purposes of the FSA, making the agency one of the first places a beginning farmer should look when needing credit.
Targeting Funds to Beginning Farmers
The Farm Service Agency is required to target specifically to beginning farmers a portion of the funds Congress gives to it. This means beginning farmers don’t have to compete with established farmers for very limited funds. Seventy percent of funds available for direct farm ownership loans are targeted to beginning farmers through September 1 of each year (the first 11 months of the government’s fiscal year). After September 1 the funds are made available to non-beginning farmers.
Also reserved for beginning farmers until September 1 is 35% of direct operating loan funds.
Twenty-five percent of guaranteed farm ownership funds and 40% of guaranteed operating funds are also targeted to beginning farmers until April 1. Guaranteed loans are made by commercial lenders and then guaranteed against most loss by FSA. The loans are usually made at commercial rates and terms unless FSA provides assistance in reducing the interest rate.
|What is a Beginning Farmer?
In general, to obtain an FSA farm ownership loan, a beginning farmer must not be able to get credit elsewhere; must have participated in the business operations of a farm for not less than 3 years but no more than 10 years; must agree to participate in borrower training; must not already own farmland in excess of 30% of the average farm size in the county; and must provide substantial day-to-day labor and management.
An applicant for an operating loan must also not be able to get credit elsewhere; cannot have operated for more than 10 years; must agree to participate in borrower training; must provide substantial day-to-day labor and management; and must have sufficient education and/or experience in managing and operating a farm.
The second factor in determining whether beginning farmers have access to targeted funds is the amount of funds given by Congress. As appropriations for FSA decline, so does the overall pool of money available for beginning farmers.
One provision intended to use up whatever limited funds are available allows unused guaranteed operating loan funds to be transferred to fund direct farm ownership loans on September 1 of each year.
Downpayment Loan Assistance
The downpayment loan program reflects the dual realities of increasingly scarce federal resources and the significant cash flow requirements of most new operations. It combines the resources of the FSA, the beginning farmer, and a commercial lender or private seller. Because the government’s share of the total loan can’t exceed one-third of the price, limited federal dollars can be spread to more beginning farmers.
Sixty percent of the funds targeted to beginning farmers is targeted to the downpayment loan program until April 1 of each year. Unused guaranteed operating loan funds can also be transferred to fund approved downpayment loans beginning August 1 of each year.
Under the program, FSA provides a downpayment loan to the beginning farmer of up to 40% of the farm’s purchase price or appraised value, whichever is less. This loan is repaid in equal installments at a rate of 4% interest for up to 15 years and is secured by a second mortgage on the land.
The beginning farmer must provide an additional 10% of the purchase price in cash as a downpayment. The total purchase price or appraised value, whichever is less cannot exceed $250,000.
The remaining 50% of the purchase price must be financed by a commercial lender or a private seller on contract. This financing may use assistance from a state beginning farmer program, which can frequently provide lower interest rates and longer repayment terms than other loans from commercial lenders. The loan or contract must be amortized over a 30-year period but can include a balloon payment due anytime after the first 15 years of the note.
A commercial loan (either farm ownership or operating) made to a borrower using the downpayment loan program may be guaranteed by the FSA up to 95% (compared to the regular 90%) of any loss, unless it has been made with tax-exempt bonds through a state beginning farmer program.
Here’s an example of how the downpayment loan program works: For a farm with $200,000 purchase price or appraised value, a beginning farmer would have to put up $20,000 in cash as part of the downpayment. FSA would provide a downpayment loan of $80,000 (40% of the purchase price) at 4% interest to be paid in 15 annual equal installments of $7,195. The $100,000 remainder of the purchase price would be financed by a commercial or private lender, and rates and terms will vary.
The commercial lender or contract seller would be given a first mortgage ahead of the FSA downpayment loan. A $100,000 loan at 8% for a 30-year term, for example, would require an annual payment of $8,883.
|Downpayment Loan Example
$200,000 Purchase Price
Beginning Farmer - $20,000 cash downpayment
FSA - $80,000 loan @ 4%/15 yr. Term = $7,195
Commercial Lender - $100,000 loan @ 8%/30 yr. Term = $8,883
Total Annual Cash Flow Requirement / Real Estate = $16, 078
FSA is required to widely publicize the availability of the downpayment loans among potential beginning farmers and retiring farmers, and to encourage retiring farmers to sell their land to a beginning farmer. They are also required to coordinate the downpayment loan program with state beginning farmer programs. Guaranteed loan fees are to be waived if a loan from a state beginning farmer program is guaranteed under one of these formal partnerships.
The low interest rate on the FSA downpayment loan and the favorable terms should help beginning farmers build equity during the first 15 years of ownership. However, careful financial management will still be needed and a beginning farmer should not take on more debt than he or she can handle.
Joint Financing – Direct Farm Ownership
Another farm ownership program was also created in 1996 allowing beginning farmers to obtain up to a 50% loan at 5% interest rate if a commercial loan or contract sale was obtained for the remaining purchase price. Under this program a beginning farmer would not have to come up with a downpayment, but would therefore, be 100% leveraged on her or his real estate loan.
Operating Loan Assistance
Beginning farmers, like all borrowers, can obtain a direct operating loan at subsidized interest rates. Guaranteed loans are also available and if the beginning farmer has a downpayment loan, the bank loan can be guaranteed up to 95%.
"Graduation" to commercial credit is mandatory for all operating loan borrowers after 15 years. A direct loan, however, can only be obtained for seven years, with guaranteed loans possible during the remaining years. The seven years can be consecutive, non-consecutive, or a combination thereof. Each year an advance on a line-of-credit is taken counts toward the limit on the number of years a farmer is eligible for a loan.
Inventory Farmland for New Farmers
FSA is required to advertise inventory property for sale within 15 days after they acquire the property. The property is sold at appraised market value and beginning farmers are given a priority in the purchase of inventory property for the first 135 days after acquisition. If more than one qualified beginning farmer applies to purchase the property, the successful buyer is chosen randomly.
If there are no direct farm ownership loan funds or "credit sale" funds available for the beginning farmer to use, FSA may lease or contract to sell the property to the beginning farmer for up to 18 months or whenever funds do become available, whichever comes first. The rental rate must reflect the income-generating potential of the property during the period of the lease. If no beginning farmer buys or leases the property within 135 days, FSA is required to sell the property at a public sale within 30 days following the 135 day period.
Inventory land has a tremendous potential for providing opportunity and entry to a new generation of farmers. See a list of the national directory of inventory properties here.
|Where Can I Apply?
To apply for a loan you should contact the local FSA county office where you plan to farm. For the downpayment loan you will also need to apply with a commercial lender for the remaining financing. If you're buying land on contract you will work directly with the landowner.
All FSA borrowers of both direct and guaranteed loans are required to participate in "educational training…in financial and farm management concepts associated with commercial farming." This program, more than any other, may be the key to insuring a successful operation for beginning farmers.
Borrower training courses are to include training in goal setting, record keeping, cash flow planning, and crop and livestock production. Congress has also encouraged FSA to incorporate information on sustainable agriculture and integrated farming systems into the training curricula as well.
FFSA must contract with a state agency or a private entity (including a community college, extension service, State Department of Agriculture, or a non-profit organization) to provide training. The training is open to the public, but FSA borrowers will be required to participate as a condition of eligibility for new loans. Participants must pay for the training but can use operating loan funds for this purpose.
|Other Beginning Farmer Programs?
Several states have additional beginning farmer programs. The number and types of programs vary. Contact your State Department of Agriculture, extension, or Wyatt Fraas, email@example.com at the Center for Rural Affairs for information on other programs that may be available in your area.
For more information, contact Wyatt Fraas, firstname.lastname@example.org.
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