People take out loans all the time, most notably on new cars and mortgages.
Farmers also take out loans in order to secure the farmland that will ultimately provide local, national and international communities with the crops that come from it.
However, securing a farm real estate loan can be a lengthy process and certain procedures and protocols must be followed to ensure the loan gets issued in good faith.
Below is some information from the Canadian Agricultural Loans Act. It outlines information that farmers, or anyone wishing to have farm real estate in Canada should consider before going through with the process.
Owner vs. Tenant
As an owner of the land, once the loan term is over, the farmland is owned. However, if the loan is for the purpose of a lease, the farmer must continue to lease the land for two years after the loan has been repaid.
Solo or group venture?
Depending on the stake in the farm, paired with other CALA loan amounts, the eligibility can differ. As an individual borrower or in a partnership, the principal amount can’t be more than $500,000.
If in a partnership, each member is given a pro-rated share of the loan to pay back.
Example: $250,000 loan divided by 2 farmers = $125,000 per farmer.
Each individual cannot exceed more than $500,000 when including any other CALA loans.
If the applicants for the loan make up a co-operative association, the amount can’t be more than $3 million.
What is the farming status of the owner?
If the owner is an existing and established farmer, the loan must not be for less than 80% of the property’s value or the purchase price.
If the owner can be described as a beginning farmer (been farming in Canada for less than six years or intend to start farming in Canada), the loan must not be for less than 90% of the property’s value or the purchase price.
In the United States, farmers looking to attain more land can look to the Farm Service Agency (FSA) for loans and requirements.
What kind of loan is needed?
There are loans that fall under the Guaranteed Loan Program, loans made by banks, Farm Credit System or credit unions. FSA protects up to 95% of the lender’s loan against losses.
Direct Loan Programs are loans made out by the FSA using government money. FSA provides counseling and supervision to help farmers evaluate their goals.
Different loan programs have different provisions
A Direct Farm Ownership loan has a maximum borrowing amount of $300,000. The interest rate is fixed and the payback term is up to 40 years.
A Guaranteed Farm Ownership loan has no maximum loan as its adjusted each year for inflation. The interest rate is negotiated between the borrower and lender with a payback term of up to 40 years.
There are many different contributing factors to securing a farm real estate loan. The farmers themselves will have a greater understanding of their finances and other records before approaching a lender about a potential loan.