When I bought my farm 10 years ago, I learned the hard way that financing can be tricky.
I talked to many different banks to get pre-approved for financing and to find the best rate and term. At the time, conventional mortgages were in the 5.5 to 6 percent range, and I naturally assumed I could get a mortgage with a similar low rate. How wrong I was! Most of the small local banks I spoke with said they would only write loans in their county or adjacent county, which limited my chances for shopping around for a good loan. Because I was trying to purchase more than 20 acres, they said I couldn’t have a conventional mortgage--I would have to get an agricultural loan.
The banks required at least 30 percent down payment on a five or “maybe” seven year balloon loan with a 7 to 7.5 percent interest rate. It didn"t matter which bank I spoke with, the story was the same. When I pointed out that conventional mortgages were a full 2 points lower with a longer term than what these banks were quoting me for an agricultural loan, the banks said that agricultural loans weren"t open to the other funding sources that are available to the convention mortgage market, thus the shorter term and higher interest rates.
In addition, all of the banks expected the farm to earn enough money through farming to pay the mortgage! The banks really didn"t want to consider my off-farm income for servicing the debt. The banks set the limit at what I could borrow based primarily on the farm"s ability to generate income. In the end, only Farm Credit Services of America made it possible for me to buy a farm. Only they were able to offer rates and long terms comparable to a conventional mortgage.