As a farmer, whether you have many years of experience or you are just starting out, there comes a time when you need a loan to. Farm loans can provide liquid cash for farmers at the startup phase and established farmers with a cash crisis during a challenging period. In many ways, applying for a farm loan is similar to securing a home loan, but there are a few key differences. We’ll discuss how to prepare for your farm land loan request.
Gather Your Documents
The next stage in the loan application process is to gather your vital documents and fill out the necessary paperwork. When filling out your documents, you might want to get help from your business consultant. Even though it takes a long time to gather your documentation, it will save you time when the lender reviews your application.
Consider Your Farm Business Structure
Since the structure of your farm affects your personal liability and risk, it can also carry implications when applying for a loan. Some of the common questions a farm land lender may ask about your business structure include:
- Who is purchasing the farmland?
- Are there entitles involved?
- Who do you plan to sign the loan documents?
Before engaging in a farmland purchase, it’s a good idea to consult with your attorney or accountant to establish the best way to structure your farm investment from a legal and tax perspective.
Prepare Your Financial Documents
Make a full and accurate record of your financial data. A conventional lender generally asks applicants to provide at least two years of tax returns and an updated balance sheet. You should also be ready to give proof of any work income and recent statements for any investment or retirement accounts.
The financial information necessary to start your loan application helps lenders construct the ideal loan structure for you with the least amount of risk. Land lenders check for the following metrics in your financials:
- Fixed Cost Structure: How can the farm land purchase affect your fixed costs per land acre?
- Loan Repayment Structure – What are your options if your farm land does not offer sufficient cash flow and you’ll use multiple income streams for loan repayment?
Make a Compilation of Operational Summary
In addition to your business plan and financial documents, a description of your existing business or investments, including total acres, average yield, rent amounts, and your predicted cash flow, is helpful. Giving your lender this information will assist them in better evaluating the viability of your purchase and how it will affect your overall financial health. When you have acquired all of the essential information, you are ready to submit your loan application. Your financial information will be assessed, and your lender will determine if it meets their requirement.
Refinance Existing Debt
If you have existing debt, you may want to talk to your lender about refinancing. Generally, this option makes sense for farmers looking to reduce their current interest rates by at least 1 percent. Refinancing to a lower rate can help you reduce your monthly payments by extending your loan or reducing your term to pay off the loan quicker. In addition to the regular application information required, you may also need to get a copy of your current promissory note to discover any restrictions or pre-payment fees with your current lender.
Incomes That Qualify You for Farm Land Loans
If you want to maintain your existing job and it pays enough, your wages will be utilized to fulfill your debt-to-income ratio. For wage earnings, a lender will need W2s from the last two years and pay stubs from the previous 30 days. The last two years of tax returns for self-employed persons will be gathered.
If you quit your existing source of income to pursue a new agricultural company, you must produce a comprehensive business plan that includes the following information:
- Detail your previous work history
- Discuss your business plan
- Complete an industry analysis
- Offer an exit strategy
Credit Score Requirements for Farm Land Loans
Each lending institution has its specific requirements for qualification for any of its farm land loan programs. One of the first things they look at is an applicant’s current credit score. Generally, you should have a credit score of at least 700 to stand a better chance of loan approval. However, while bad credit is infamously a huge obstacle to getting a loan.
It may be difficult for farmers, especially first-timers, to apply for a farm land loan. It’s quite demanding to be financed when you don’t have a track record, just like any other business. Fortunately, United Farm Mortgage can help you through the loan application process and get what you need to set up a successful agricultural business. Learn more about this process by chatting with one of our experts today about your farm land loan options.
References:
https://www.business.com/articles/agricultural-loans/
https://www.valuepenguin.com/small-business/usda-farm-loans
https://nesfp.org/sites/default/files/resources/applying_for_a_farm_service_agency_loan.pdf