By Chris Zoller, Ohio State University Extension Educator, ANR in Tuscarawas County
Building and managing a successful farm is a big financial investment and can be especially difficult for those just starting out, especially those who cannot obtain financing from commercial lenders. The Farm Service Agency (FSA) of the United States Department of Agriculture (USDA) provides and guarantees loans to beginning farmers.
Each year, money is allocated to the FSA for farm property and farm business loans for beginning farmers. These loan programs are important because beginning farmers have always had more difficulty obtaining financial assistance.
What is a beginning farmer?
A beginning farmer is a person or entity who:
- Not operate a farm for more than 10 years
- Substantially participates in the operation
- For farm property loans, the applicant cannot own a farm greater than 30% of the average farm size in the county, at the time of application.
- If the applicant is an entity, all members must be related by blood or marriage, and all members must be eligible beginning farmers.
In addition, beginning farmers must meet the program’s loan eligibility criteria.
Maximum loan amounts
The Farm Service Agency offers a variety of loans, each with a different maximum loan amount. The types of loans and the maximum amounts authorized are indicated below:
- Direct Farm Ownership: $600,000
- Direct operating loan: $400,000
- Microcredit: $50,000 each for operating and owning a farm
- Secured farm property or operating loan: $1,825,000
- EZ Guarantee: $100,000 ($50,000 if the lender is a micro-lender).
Down payment program
The FSA has a special loan program to help beginning farmers buy a farm. Retiring farmers can use this program to transfer their land to future generations. The requirements are listed here:
- Cash deposit of at least 5% of the purchase price
- Loan amount limited to 45% of the lesser of:
- Farm purchase price
- Appraised value of the farm or
- $667,000 ($300,150) maximum
- 20 year loan term
- The interest rate is 4% lower than the direct farm ownership rate, but not lower than 1.5%.
The remaining balance can be obtained from a commercial or private lender. FSA can guarantee up to 95% of the loan if financing is obtained from a commercial lender. Participating lenders do not incur loan guarantee fees.
If the financing is secured by participating lenders, the amortization period must be at least 30 years and cannot have a lump sum payment due within the first 20 years of the loan.
Additional options to access capital
Beginning farmers may be interested in participating in a joint financing arrangement. FSA will lend up to 50% of the financed amount and another lender will provide the remaining percentage. These funds may be used for any permitted farm property purpose. The interest rate is 2% lower than the direct ownership rate, but not lower than 2.5%. The term of the loan will not exceed 40 years or the useful life of the title.
Land contractual guarantees
The FSA provides financial guarantees for land sales to beginning farmers. The seller can request either:
- Prompt payment guarantee: a guarantee of up to three amortized annual payments, plus the cost of property taxes and related insurance.
- Standard guarantee: a guarantee of 90% of the outstanding principal balance under the land contract.
The purchase price of the farm cannot exceed $500,000 or the market value of the property. The buyer is required to provide a minimum deposit of 5% of the purchase price of the farm. The interest rate is fixed at a rate which must not exceed the interest rate for the direct agricultural property loan in force at the time the guarantee is issued, plus three percentage points. The warranty period is 10 years. Contract payments must be amortized over at least 20 years.
How to register
Direct loans are available from your local agricultural service agency office. For secured loans, you must apply with a commercial lender who has participated in the Secured Loans Program. Your local FSA office can provide a list of participating institutions.
If you are unsure which FSA office serves your county, please visit: https://www.farmers.gov/working-with-us/service-center-locator.