Farm loan programs (program) were established to help beginning farmers who were ineligible for conventional loans. The program offers affordable financing, reasonable down payment, and built-in safeguards, such as farm management training and financial planning to help minimize a farmer’s risk.
A beginning farmer or rancher refers to an individual or entity who:
- does not have experience of farm operating for more than 10 years;
- meets loan eligibility requirements of the program;
- substantially participates in farm operation; and
- does not own a farm greater than 30 percent of a median size farm in a county.
According to the Agricultural Credit Improvement Act of 1992, the U.S. Department of Agriculture (USDA) or the Farm Security Agency (FSA) offers both direct and guaranteed operating loans (OL) to family-size farmers and ranchers who are incapable of obtaining commercial credit from a bank.
Direct and guaranteed OL are offered to:
- to beginning farmers who cannot qualify for conventional loans;
- to farmers who are victims of a natural disaster and consequential financial setbacks (emergency loans); and
- to farmers who cannot maintain profitable farming operations because of their limited resources.
Direct and guaranteed OL can be used to:
- purchase livestock, equipment, feed, seed, and supplies;
- purchase land, construct buildings or make farm improvements;
- refinance debt; and
- establish and operate income-producing projects.
Eligibility for direct and guaranteed OL includes that an applicant for a loan:
- must be a U.S. citizen or legal resident alien;
- must be unable to obtain sufficient credit from other sources;
- must have acceptable credit history;
- must have adequate collateral, and sufficient loan repayment ability; and
- should not be delinquent on any federal debt.
Eligibility for obtaining emergency loan includes:
- applicant’s operation area must form part of the area that has been declared as a disaster area by the President or such area must have been designated as a disaster or quarantine area by the Secretary of Agriculture;
- applicant must have suffered production loss as direct result of a natural disaster or quarantine;
- applicant must be unable to obtain credit otherwise;
- applicant must be between 10 and 20 years old; and
- applicant must live in a town of fewer than 10,000 people.
The maximum loan amount guaranteed by the FSA for direct OL is $300,000 and for guaranteed OL is $1,112,000. The amount guaranteed under the program varies annually depending on inflation.
Applications for direct OL must be submitted with the local FSA office having jurisdiction in the area where farm operation is located. Details about local FSA offices can be found in a telephone directory under the USDA or the FSA. A guaranteed OL application must be submitted with a commercial lender who participates in a guaranteed loan program.
Special loan programs offered by the FSA to assist Socially Disadvantaged Applicants (SDAs) and beginning farmers in purchasing farm are called down payment program (special loan). SDAs include women, African Americans, Alaska Natives, American Indians, Hispanics, Asians, and Pacific Islanders. Retiring farmers use special loan to transfer their land to future generation farmers and ranchers. To get a special loan an applicant must satisfy the following conditions:
- s/he must be a beginning farmers and rancher;
- s/he must make a cash down payment with a minimum of 5 percent of purchase price; and
- loan amount should not exceed 45 percent of the purchase price or the appraised value of the farm or $500,000.
A special loan is given for a period of 20 years. The interest rate for a special loan is four percent less than the direct OL rate, but it will not be less than 1.5 percent. The balance loan amount for purchase of farm or rancher can be obtained from a commercial lender or a private party. In such cases, a 95 percent guarantee will be offered by the FSA. Where such financing is obtained from a participating lender, the loan period will be 30 years and such loan will not include any balloon payment for the first 20 years. Participating lenders need not pay any guarantee fee under a special loan.