Getting a farm land loan is an inevitable move for start-up farmers, especially if they don’t have the finances to fund their projects. How you approach lending farms is a crucial factor as this will make or break your way back to repaying a loan. The primary concern revolving around farm land loans is interest rates over the payment period.
Several factors determine farm land loan interest rates, but let’s first look at the importance of getting reasonable rates. Good interest rates will ensure that you’ll eventually pay up a smaller amount after all installments are made. It also gives you flexible terms on which you can make good use, to make repayment easier.
So what are the factors that determine farm land loan interest rates?
Several factors determine the interest rates a lender will give you. These determinants include:
1. Type of Property
A residential farm will cost less than a commercial farm will. This entirely is focused on the risks involved as the latter accommodates more risk as it is used for business needs. Furthermore, residential farms are smaller than commercial farms, thus making their prices different altogether. The location of your farm is also a determining factor as lands in good yielding areas are more costly than those in less productive areas.
2. Income and Type of Employment
Your income is a significant factor in the loan interest rate you’ll be charged. If you earn more, you stand a chance to get more funds from a lender. The vice versa is true, as a lower income will only give you an average amount.
This is all about your repayment ability, as lenders would want to lower their risks and avoid listing you as a defaulter. Your type of employment also matters a lot as a stable job is likely to be given a loan compared to a casual worker. Lenders mainly consider fully employed individuals with a steady income as they stand a better chance of paying for their loans.
3. Loan Size
How much are you looking to get from a lender? Often if you’re looking to get a higher amount of more than $100,000, you stand a chance of getting better loan interest rates as this will attract good profit to the lenders. Lower amounts are often charged higher interest rates to put off farmers as this isn’t good for business.
4. Type of Loan
The type of loan you’ll get from a lender will determine the interest rates you’ll be charged. There are different types of interest rates, including fixed, adjustable, variable, and balloon interest rates. Most farmers opt for fixed rates because of the stability of paying up, as there is a constant installment amount payable after an agreed period. However, if the odds seem to be working from your point of view, an adjustable interest rate can help you save up significantly if it drops over time. However, there’s a risk that the rate will increase significantly.
5. Loan to Value
The loan to value (LTV) is the percentage of your loan amount to the property’s stipulated value. Ideally, a lower percentage yields lower interest rates. On the other hand, a higher percentage will put you at risk of getting a higher interest rate.
6. Credit Score
A credit score is the numerical expression of an individual’s credit history based on a level analysis representing your credit worthiness. A higher credit score will earn you lower loan interest rates. So what are high or low credit scores? Typically, a score of 580 – 669 is considered fair, 670 – 739 is a good score, 740 – 799 is very good, and a score above 800 is excellent.
7. Credit History
So what credit history do you have on record? A significant and detailed credit history provides knowledge of your payment history and ability. This puts you at a priority level of getting reasonable rates. However, a shallow credit history doesn’t offer many references of your payment details to a lender. Which often puts many financial institutions off or gets you a higher interest rate instead.
8. Payment Period
For how long are you planning to pay up the loan? The payment period is also something that many lenders pay attention to. A more extended payment period might be a disadvantage as you’ll likely be given a higher interest rate. However, it might be convenient for you to pay as it’ll probably have a lower installment amount. On the other hand, if conducive to you, a shorter payment period will be an excellent option. You’ll get lower interest rates, but you stand to pay higher installment amounts. So it’s essential to check with your income to see if you can afford it.
9. Payment Frequency
The agricultural industry holds a unique nature, and with evident general climatic change, there’s more uncertainty about production, although that’s what experts are working on. Selecting a suitable payment plan is crucial for this. A monthly payment plan is more likely to have lower interest rates than annual and semiannual payment plans.
10. Debt Ratio
The debt ratio translates to the monthly earnings versus the cost of the monthly bills. Most lenders use a typical debt ratio of 42%, an average throughout the industry.
11. Co-Borrowers
If you’re taking the loan individually, this is not a section you should consider. However, for group or ranch loans, co-borrowing is a crucial factor. This is where you’re taking a loan with other borrowers. A lender will consider each individual’s credit score and ability to pay to prove that it’s worth giving the loan. This best applies to group loans.
12. Documentation Available
Risk is a primary consideration in giving out loans. The necessary documentation can help you ease your way through these risks and earn lower interest rates from your lender. Documents such as tax records, bank statements, and records of related accounts will be instrumental in processing the loan.
Others
Other than the significant determinants of farm land loan interest rates, other factors affect the rates that you will be charged. They include:
- Closing date
- Residency
- Asset seasoning
- Improvements needed
- Relocation
- Gifts
- Combined Loan to value
- Escrow preference
- Occupancy type
- Available assets
- Housing ratio
- Employment history
- Seller contributions
- Cash-out
It’s crucial to tick all the determinants boxes to get the best farm land loan interest rates. You have to work your way up to qualify for reasonable rates with your lender. Lenders such as United Farm Mortgage will give you farm loans to facilitate your projects and help you achieve your set goals. However, you’ve got to prove that you are creditworthy to get the best interest rates.
Reach out to United Farm Mortgage for all your farm loan needs.