The United States Department of Agriculture (USDA) offers different types of farm land loan programs designed for beginning and old-timer farmers and ranchers. While some of these farm land loans come directly from the USDA, other loans are issued by third-party lenders with part of the loan guaranteed by the USDA.
USDA also provides credit opportunities to diverse or underserved groups of farmers and ranchers to start, expand or boost family farming and ranching operations. These groups include women farmers, minority, alternative farms, young farmers, urban and rooftop farmers, organic crops, and specialty crops. The government-backed USDA program offers many benefits, including less stringent credit qualifications and 100 percent financing. But these loans also have some limitations and challenges. Here’s a closer look at the pros and cons of farm land loans by the USDA.
Pros of Farm Land Loans by USDA
If you are eligible for one of the many USDA farm land loans, you can enjoy many benefits. Here are just a few of the significant perks the United States Department of Agriculture offers prospective farmers and ranchers:
No Down Payment Requirement
The USDA loan is one of the few farm mortgage programs that still allows farmers and ranchers to buy farm land with no down payment. This is a massive thing because many first-time farmers say the down payment is their biggest obstacle. Using a USDA Loan allows you to save a significant amount of money just by expanding the area in which you are willing to farm.
Lower Insurance Premium
If you do not put down 20% on farmland, you will almost certainly have to pay mortgage insurance. This is known as private mortgage insurance on traditional loans. This insurance allows you to buy farm land without a large down payment, but there is a monthly cost to consider. Except for VA loans for veterans and active-duty soldiers, the USDA Rural Development Loan has the lowest PMI of any credit program. A reduced PMI equates to a lower monthly payment.
Competitive Interest Rates
It is always crucial to examine your interest rate while financing a property. Your interest rate decides how much you will pay the bank to borrow their money. The lower your interest rate, the better off you will be. Compared to small business agricultural loans received through private lending companies, USDA loans have lower interest rates. The goal of this lending program is not to make income, as commercial lenders do, but to help people in need.
Fast Approval from Private Lenders
USDA loans using money from private and commercial lending institutions such as banks, farm credit system institutions, and credit unions can be reviewed and authorized fast. This is because the federal government guarantees most of the loan and interest paid by the borrower. Because the government’s loan program secures the majority of the grant, private lenders are more ready to approve and supply cash for USDA loan applicants.
Reserved Funding for Specific Groups
Every year, the federal government sets aside a huge budget for diverse or underserved groups of farmers and ranchers that they can use to purchase farm lands. These funds are only available to qualifying beginning farmers and socially disadvantaged (SDA) groups that are into farming. Each fiscal year, there is a different percentage of targeted funds for farm or ranch owners designated as beginning farmers.
No Prepayment Penalty
Some lenders charge borrowers a prepayment penalty if they pay off their loan within the number of years specified in their mortgage contracts. The explanation is that mortgage investors want to be able to guarantee a specific rate of return. Prepayment penalties are not permitted for lenders offering USDA-guaranteed mortgages.
Availability of Funds for Emergency Needs or Disaster
As a farmer or rancher, if your business operation is affected by natural disasters such as drought, flood, or hurricane, you may qualify for disaster funding. This loan is also designed to assist in the recovery of agricultural production losses and damages caused by catastrophic disasters. The availability of emergency funds for the restoration or replacement of essential farm holdings, equipment, and machinery. It can also cover the living expenditures of family members while they are waiting for their income to be restored.
Multiple Ways to Pay Closing Costs
Another advantage of a USDA loan is that closing fees can be paid in various ways. While these loans do not require a down payment, there are still closing costs to consider, and they can rapidly add up. The average mortgage closing cost ranges from 2% to 5%. If you can’t afford your fees, you have several options with USDA loans.
Cons of Farm Land Loans by USDA
Despite all of the pros of a farm land loan from USDA, it also has its cons. The following are some of the cons of farm land loans by the United States Department of Agriculture.
Geographic Location Requirements
A USDA loan can only be used to purchase farm land in a USDA-approved location. These loans are not limited to rural areas, despite their name. Many suburban communities are also eligible. While the USDA places limits on qualifying city populations, villages and cities “rural in nature” may also be eligible. This gives a lot of room for interpretation, so double-check your location on the eligibility map.
Longer Underwriting Times
Lenders can review and approve loans such as VA and FHA independently. On the other hand, the USDA does not give lenders such authority. After the lender has approved the loan, the USDA reviews it. Compared to other lending schemes, this could take longer to close the deal.
USDA farm land loans might be an excellent alternative for farmers and ranchers who want to avoid paying a down payment when purchasing farm land in an eligible rural location. No down payment is required, and closing fees can be financed. If you’re unsure whether you qualify for a USDA Rural Development loan, contact United Farm Mortgage to learn more about the program and the paperwork you’ll need for a full application.
References:
- https://www.quickenloans.com/learn/benefits-usda-loans
- https://www.lendingtree.com/home/usda
- https://www.valuepenguin.com/small-business/usda-farm-loans
- https://www.fsa.usda.gov/Internet/FSA_File/fsa_br_01_web_booklet.pdf