Securing an agricultural mortgage loan might seem a little bit intimidating. After all, you’re taking a significant financial risk and putting your farm on the line. If you default on the loan, the lender can foreclose on your collateral.
This is why it’s essential to be cautious and ensure that you fully understand the terms of the agriculture loan you’re signing up for before signing any agreements.
But don’t worry — it doesn’t have to be all that daunting. When it comes to agriculture loans, choosing the right lender can make all the difference.
Working with a lender who understands your financial goals and farms’ operations can make the process much less stressful.
The best agriculture loan lenders appreciate the unique challenges of a farming business, from how seasons can affect your cash flow to how government regulations can impact your operations.
They will take the time to look at your financial fundamentals and help you secure the funding you need to grow your business.
Common questions about agricultural mortgage loans
As agricultural lenders, we frequently get asked questions from those eager to secure an agricultural mortgage loan, such as:
- How does an agricultural mortgage loan differ from other farm loans?
- What qualifications are needed for an agricultural mortgage loan?
- What steps can I take to boost my chances of approval?
- Which agricultural mortgage loan best suits my needs?
In this blog, we answer these questions to help you decide if this financing solution suits your needs. We will focus specifically on the general criteria lenders use when reviewing agricultural mortgage loan applications so you can find out if you qualify.
Agricultural mortgage loan vs. farm operating loan
Agricultural mortgage loans and farm operating loans address different financial needs.
An agricultural mortgage loan is typically used for purchasing, refinancing, or improving farmland and farm-related buildings. It supports investments that increase the value of the farm property.
For example, these loans could be used to purchase additional land to expand operations, construct new barns to accommodate more livestock, or implement energy-efficient upgrades to make operations more efficient—all of which ultimately drive more profit.
Secured by the property, these longer-term loans allow you to lock in lower interest rates and manage significant capital investments more effectively. Cost structures are predictable because of the fixed interest rates, so you can better plan your finances over the long term.
By spreading out the cost of a large purchase over a more extended period, these loans ensure you don’t strain your cash flow in the short term.
A well-structured agricultural mortgage loan can also help farmers like you weather economic downturns. If you lock in a lower interest rate, you can protect yourself from rising interest costs and maintain your farm’s financial stability to position it for sustainable growth.
In contrast, a farm operating loan is used to pay for the daily costs of running a farm, such as buying seeds, fertilizers, feed, and other essentials. These loans are usually short-term and often revolving — meaning the funds are repaid and made available for use again in subsequent periods. They’re primarily designed to smooth out the cash flow bumps that often come with the seasonal nature of farming income.
While both loan types of agriculture loan can be beneficial depending on your situation, agricultural mortgage loans can shield you better against market fluctuations and ensure you have the resources to grow and improve your farm over time.
Critical criteria for obtaining an agricultural mortgage loan
Of course, different agriculture loan lenders have different requirements, but most share a standard set of criteria (though there are some exceptions based on individual cases).
Here’s a breakdown of what you’ll generally need to qualify for an agricultural mortgage loan:
- You must be a farmer, rancher, rural landowner, farm real estate investor, or someone involved with recreation and timber land.
- You must own or be in the process of buying a sizable piece of land (some lenders require at least 25 acres).
How much can you get?
Some lenders lend as little as $50,000. But here at Private Capital Investors, our agriculture loans start at $3 million and can go up to $50 million.
Generally, your loan can’t exceed 70% of your land’s market value. You need to provide the remaining 30% as a down payment (or have equivalent equity in the property if you’re refinancing).
Documentation requirements for agricultural mortgage loans
To improve your chances of getting approved for an agricultural mortgage loan, you must present a solid set of documents that clearly show two things:
(1) your farm’s financial health and
(2) your business acumen as a farmer.
Again, different lenders will ask for different documents, but almost all of them require the following:
1. Farm business plan
Prepare a business that lays out your farm’s financial projections and goals and shows how you intend to achieve those goals. The key is showing lenders how you intend to use the money and demonstrating that you can repay it.
Make sure that your plan covers the following:
- A detailed description of your farming operations (including the types of crop or livestock you have, farm size, target markets, etc.)
- An overview of your farming experience and skills, plus memberships to agricultural associations and partnerships with local cooperatives
- A specific strategy for how you’ll use the loan
2. Farm balance sheet
This financial statement is a snapshot of your farm’s financial standing at a specific point. It should include:
- A comprehensive list of your farm’s assets, liabilities, and equity
- A detailed debt schedule with information on interest rates, payment terms, and due dates
Many lenders will require a reasonably recent balance sheet (no more than three months old).
3. Income statement
Your income statement should include any document that verifies your income, such as your tax return, a profit and loss statement, or audited financials. Your lender will use these to assess your financial health.
4. Verification statement
Most agriculture loan lenders will also want to see bank statements for your asset accounts or debt statements to confirm the details listed on your balance sheet.
5. Financial projection
Prepare detailed financial projections that outline your farm’s expected revenue, expenses, and cash flow. Your goal is to convince the lender that you can cover both principal and interest payments over the life of the loan.
Loan qualification requirements for agriculture mortgage loans
Once you’ve proven your eligibility and compiled your documents, you can apply for an agriculture loan. Different lenders have different underwriting processes, but they all evaluate some common factors:
1. Debt service coverage ratio (DSCR)
This ratio shows whether your farm generates enough cash to cover your debts. You can calculate your DSCR by dividing your net operating income by debt obligations. A DSCR above 1.25 is excellent, but anything below 1.00 might signal financial stress.
2. Debt to asset ratio
This ratio compares your total liabilities to your assets to gauge your operation’s leverage. A debt-to-asset ratio under 50% shows lenders a healthy balance. It tells lenders that less than half of your farm’s assets are financed through debt and that you are not overly reliant on borrowed funds.
3. Current ratio
Lenders evaluate your current ratio to evaluate your ability to handle short-term debts due within the year.
To calculate this ratio, divide your current assets by your current liabilities. Current assets include cash on hand, accounts receivable, inventory, and other assets expected to be converted into cash within a year.
Current liabilities refer to obligations due to be paid within the same timeframe — such as accounts payable, short-term loans, and similar debts.
A low ratio might be a red flag for lenders, as it shows that your farm does not have enough liquid assets to cover its short-term liabilities.
4. Loan-to-value (LTV) ratio
Understanding the value of your collateral and the loan amount is crucial. Lenders generally limit the LTV ratio to 70%. For instance, if your land is worth $10,000,000, you could qualify for a loan up to $7,000,000.
5. Credit score
Credit scores can vary for farmers and ranchers due to various factors. Lenders specializing in agriculture loans will look at the whole picture — not just one number — so even if you have a lower credit score, they may still grant your loan.
Apply for an agriculture loan
Farming is tough — it’s unpredictable and demanding. That’s why at Private Capital Investors, we offer a range of versatile loan options for borrowers in the agricultural industry.
You can count on our experienced loan officers to design a financing plan for your farm’s unique circumstances. We aim to give you the robust support you need to thrive and expand your business.
Whether in Miami, Florida, Denver, Massachusetts, Phoenix, or Texas, we can help you secure the needed agriculture loan. Expect nothing less than:
- Common sense underwriting that understands farming realities
- Competitive rates start as low as 7.5%
- Nationwide lending to reach you wherever you farm
- Quick approvals to fast-track your farming needs
- Funding in as little as 14 days to keep you moving
Are you considering taking out an agricultural loan but need some guidance? Contact our team of stated income commercial lenders at Private Capital Investors.
