If you're considering buying a farm, one of the most common—and important—questions you'll face is: What loan programs are best for farm buyers? With so many options and unique buyer circumstances, there's no one-size-fits-all answer. However, understanding the most popular farm loan types can help you prepare for the process and find the best financing solution for your situation.
In this guide, we’ll break down the most commonly used farm loan programs, discuss how to prepare for pre-approval, and offer insights into government-backed and commercial financing options.
Key Things to Know Before Applying for a Farm Loan
Before diving into specific loan programs, here are a few foundational points every farm buyer should understand:
- Acreage Limits: Always check with your lender to ensure that there are no acreage limits. Also note that they may restrict how much of the property’s appraised value can come from the land itself. For example, some loans may require that no more than 30% of the property’s value be attributed to the land, with the remaining 70% coming from the home and outbuildings.
- Closing Costs Still Apply: Even if you qualify for a zero-down loan, you'll still need to consider closing costs, which typically range from 2%–5% of the purchase price.
Why Pre-Approval Is Essential
Getting pre-approved before shopping for a farm is critical. A pre-approval letter:
- Gives you a clear idea of your budget.
- Will be required with an offer
- May be required before even touring certain properties.
The pre-approval process usually takes just a few days and involves submitting financial documentation like pay stubs, tax returns, and bank statements. Lenders will also review your credit score and debt-to-income (DTI) ratio, which includes all monthly debt payments. Commercial lending typically moves much slower, but more on that later.
Most Common Loan Programs for Farm Buyers
1. Conventional Loans
Many buyers are surprised to learn they qualify for a conventional mortgage when purchasing a farm, especially for residential farmettes or hobby farms. These are the most common loans used in real estate transactions, including rural properties.
Key Features:
- You don’t need a 20% down payment, but Private Mortgage Insurance (PMI) is required until you reach 20% equity.
- PMI automatically drops at 22% equity, but you can request removal at 20%.
- Interest rates vary based on credit score, loan amount, and down payment.
- Some lenders may allow a Debt to Income Ratio (DTI) up to 50%.
- Choose a lender experienced with rural and farm properties to ensure smoother process.
2. Commercial Financing
If you’re buying a working farm or a property with substantial income potential, commercial financing may be the right route—or the only route.
Options Include:
- Farm Credit (e.g., MidAtlantic Farm Credit): A cooperative lender serving multiple states including MD, DE, VA, PA, and WV. Farm Credit offers loans for land, equipment, construction, and rural homes.
- United Ag Lending: A strong option for buyers seeking flexible financing for agricultural properties, including farms and ranches. United Ag specializes in rural real estate and understands the unique needs of farm buyers.
- Local Banks: Many community banks also have commercial divisions that offer competitive farm and land loan products, often with better local insight and tailored underwriting.
Notable Commercial Loan Features:
- Financing for land, construction, equipment, and business operations.
- Ability to combine real estate and agribusiness financing.
- Patronage dividends with Farm Credit, returning a portion of profits to borrowers.
- Often more flexible for unique property types than traditional mortgages.
- Moves at a much slower pace than traditional financing.
3. FHA Loans
FHA loans are a popular choice for buyers who want to purchase a primary residence with a low down payment.
Eligibility & Features:
- 3.5% down with a credit score of 580+.
- 10% down with credit scores between 500–579.
- Monthly Mortgage Insurance Premiums (MIP) apply, plus an upfront fee of 1.75% of the loan amount.
- Typical DTI cap is 43%, but some approvals go up to 57% under certain conditions.
4. USDA Loans
USDA loans are especially appealing to farm (and home) buyers because they offer zero down payment options and are designed for rural areas.
Key Features:
- No down payment required.
- No acreage limits, but property must be in a USDA-eligible area.
- Income limits apply based on household size and location.
- .35% annual MIP (lower than FHA), and an upfront 1% fee.
- DTI caps are usually around 41%, but approval can be stricter.
- Final loan approval can take longer because the USDA must review and approve after your lender completes underwriting.
- There is cap on how much the USDA can lend in different areas.
5. VA Loans
If you are a veteran, active-duty service member, or qualifying spouse, VA loans are one of the best financing options available.
Benefits:
- Zero down payment.
- No monthly mortgage insurance (PMI).
- Competitive interest rates.
- 41% DTI limit is recommended.
- One-time funding fee which varies based on down payment. Some veterans are exempt.
Other Financing Options & State Programs
Don't forget to explore state-specific and career-based loan programs:
- Many states, including Maryland, offer first-time homebuyer programs with down payment assistance.
- Some lenders offer specialized loans for teachers, nurses, and public service professionals.
- The USDA Farm Service Agency (FSA) provides loans to new and established farmers, including direct operating and ownership loans.
Final Thoughts: Work With a Local Lender
There are a wide variety of financing options available for farm buyers, and no two buyers have the same needs. Your best strategy is to work with a local lender who understands rural properties, government programs, and regional loan offerings. A local expert can:
- Offer faster communication.
- Understand the unique dynamics of your market.
- Help tailor a loan to your long-term goals.
Still have questions about buying a farm or financing options? Reach out to start the conversation. Whether you're looking for a small farmette or a full-scale agricultural operation, the right lender and loan program make all the difference.
Sarah is a Realtor specializing in farm and home sales in both Maryland and Virginia. She is based in Clarksville, MD.
Posted by Sarah Lipkowitz on
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