Whether expanding your farming operations or just starting, applying for an agriculture loan to purchase land puts you one step closer to your goal.
Not sure where to start? This blog aims to demystify this process and increase your chances of approval. Let’s discuss the types of loans available, the usual requirements, and how to effectively prepare your documentation.
What are the basic requirements for an agriculture loan to purchase land?
Each lender has specific requirements, but loan eligibility criteria are generally consistent across the industry.
- Farmers, ranchers, rural landowners, farm real estate investors, and those involved in recreation and timber land can apply for this loan.
- Applicants usually need to own (or intend to purchase) at least 10 acres, though some lenders require at least 25 acres.
- In many cases, citizenship or permanent residency in the US is also required.
Meeting these essential criteria is the first step in the application process.
What documents must you prepare to apply for an agriculture loan to purchase land?
Your documents should demonstrate to lenders that you have financial stability and farming experience. They also want to see how you plan to use the loan.
Most lenders will ask you to submit the following:
- Farm business plan — A well-constructed business plan demonstrates your capacity to repay the loan. This document should outline your farming operation’s goals and financial projections, describe your operations, and explain how you intend to use the loan proceeds.
- Farm balance sheet – This financial statement provides a snapshot of your farm’s economic health, listing assets, liabilities, and equity. Including a current debt schedule in your balance sheet is an excellent idea to help lenders analyze your cash flow and financial stability.
- Income statement – Proof of income may include:
- Your tax return.
- Profit and loss statements.
- Audited financials.
- Other documents that illustrate your farm’s revenue streams and profitability.
- Verification statement: The lender may ask to see bank statements for asset accounts or debt statements to verify the accuracy of your balance sheet.
- Financial projection—You may also be asked to submit detailed projections of your farm’s revenue, expenses, and cash flow. These projections must convincingly show your ability to generate enough income to cover loan repayment (including both principal and interest).
What key factors do lenders consider when underwriting agricultural land purchase loans?
The underwriting process for a farm loan revolves around evaluating specific financial ratios that provide insight into the farm’s economic health. Here are the main factors lenders consider:
- Debt service coverage ratio (DSCR) – The Debt service coverage ratio shows your farm’s ability to generate sufficient operational cash flow to cover debt obligations. A DSCR greater than 1.25 generally indicates a solid financial position, while a ratio under 1.00 may suggest potential financial difficulties.
- The debt-to-asset ratio indicates your farm’s leverage because it compares total liabilities to total assets. Private commercial Lenders typically prefer a debt-to-asset ratio below 50% (which suggests a healthier balance between debts and assets).
- Current ratio: This ratio measures the farm’s capability to pay off short-term debts. A higher ratio indicates a stronger working capital position, while a lower ratio may raise concerns about the farm’s ability to meet operating expenses and short-term liabilities.
- Loan-to-value (LTV) ratio – The LTV helps lenders understand the collateral’s value relative to the loan amount. The standard maximum LTV ratio is 75% is standard, meaning a $100,000 land appraisal could result in a loan offer up to $75,000.
- Credit score – While credit scores are essential, experienced farm lenders comprehensively view a borrower’s business health beyond just one number. Thus, it is possible to secure a farm loan despite having a less-than-ideal credit score.
What are the next steps after underwriting?
Once the underwriters have reviewed these factors, the next phase is the decision-making process. If you meet the criteria, the lender will offer terms for the loan.
Are there alternatives to traditional agricultural loans for purchasing land?
Yes. If you need to move fast to secure a property in a competitive market, a bridge loan or a hard money loan can help cover the gap until you secure permanent financing.
These loans offer quicker closing times and less stringent documentation requirements than traditional loans.
Approval is based primarily on the land’s value, not your income or farming experience. This means you can obtain funding even if your operation is new or your current financials do not meet conventional lending standards.
Reach out for personalized guidance.
Does applying for an agriculture loan to purchase land seem complex?
You don’t have to do everything alone. If you’re an aspiring borrower, contact experienced lenders for personalized assistance and detailed answers to their questions.
Professional advice can be invaluable if you’re ready to apply for a farm loan or simply exploring your options. Don’t hesitate to contact a lender who understands the nuances of agricultural financing and can guide you through each step of securing a farm loan.
Talk to our team for alternatives to traditional agricultural loans for land purchase.
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