By Chris Zoller, Extension Educator, Ohio State University, ANR in Tuscarawas County
Building and managing a successful farm is a significant financial investment and can be particularly challenging for those just starting out, especially those who cannot obtain financing from commercial lenders. The US Department of Agriculture’s (USDA) Farm Service Agency (FSA) makes and guarantees loans to young farmers.
Each year the FSA receives farm property and farm business loan funds for would-be farmers. These loan schemes are important because young farmers have historically had greater difficulty in obtaining financial support.
What is a prospective farmer?
A prospective farmer is a natural or legal person who:
- Has not farmed for more than 10 years
- Significantly involved in the operation
- For farm property loans, at the time of application, the applicant must not own a farm that accounts for more than 30 percent of the average farm in the county
- If the applicant is a legal entity, all members must be related by blood or marriage and all members must be eligible young farmers.
In addition, prospective farmers must meet the credit requirements for the program.
Maximum Loan Amounts
The Farm Service Agency provides various loans with different maximum loan amounts. Loan types and maximum amounts allowed are listed below:
- Direct farm ownership: $600,000
- Direct Operating Loan: $400,000
- Microloans: $50,000 each for operations and farm ownership
- Guaranteed farm ownership or operating loan: $1,825,000
- EZ Guarantee: $100,000 ($50,000 if the lender is a microlender).
deposit program
The FSA has a special loan program to help farmers buy a farm. Farmers who retire can use this program to pass on their land to future generations. Requirements are listed here:
- Cash payment of at least 5% of the purchase price
- Loan amount capped at 45% of the minimum amount of:
- purchase price of the farm
- appraisal of the court
- Max $667,000 ($300,150).
- 20 year loan period
- The interest rate is 4% below the direct agricultural property rate, but not below 1.5%.
The balance can be obtained from a commercial lender or private party. The FSA can guarantee up to 95% of the loan when funding is from a commercial lender. Participating lenders do not have to pay a loan guarantee fee.
If funding is secured from participating lenders, the payback period must be at least 30 years and no balloon payment is due within the first 20 years of the loan.
Additional options for accessing capital
Budding farmers may be interested in participating in a joint financing arrangement. The FSA will lend up to 50% of the amount funded and another lender will provide the remaining percentage. These funds can be used for any approved agricultural purpose. The interest rate is two percent less than the direct ownership rate, but not less than 2.5%. The term of the loan will not exceed 40 years or the useful life of the security.
Guarantees for real estate contracts
The FSA offers young farmers financial guarantees for land sales. The seller may request:
- Instant Payment Guarantee: A guarantee of up to three annual amortized installments plus the cost of associated property taxes and insurance.
- Standard Guarantee: A guarantee of 90% of the outstanding principal amount under the land contract.
The purchase price of the farm cannot exceed $500,000 or the market value of the property. The buyer is obliged to pay a minimum deposit of 5% of the purchase price of the farm. The interest rate will be fixed so that it does not exceed the direct interest rate for agricultural loans plus three percentage points applicable at the time the guarantee is granted. The guarantee period is 10 years. Contract payments must be amortized over at least 20 years.
How to apply
Direct loans are available through your local Farm Service Agency office. You must apply for guaranteed loans from a commercial lender that has participated in the guaranteed loan program. Your local FSA office can provide you with a list of participating institutions.
If you are unsure which FSA office serves your district, please visit: https://www.farmers.gov/working-with-us/service-center-locator.
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