Capital is often the largest barrier for new farmers. Retiring farmers want to sell their land. But, they do not want to take a risk on a farmer with no experience.
Rather than leaving new farmers without land and retiring farmers without a buyer, the Farm Service Agency’s Land Contract Guarantee program helps them. This program helps new farmers start their career. New farmers buy the land from retiring farmers. Instead of providing the funds, though, the FSA provides a guarantee.
This guarantee helps retiring farmers feel secure about their retirement income. If the buyer stops making their payments, the FSA will jump in and help. We look at how this works below.
How the Guarantee Works
The guarantee the FSA provides does one of two things:
- A payment guarantee – This offers the guarantee of up to three annual installments. Included in this amount is the cost of property taxes and/or insurance.
- A standard guarantee – This offers a guarantee of 90% of the outstanding principal balance on the loan. In order to choose this guarantee, though, you will need a servicing agent.
Under both guarantees, the selling farmer must make every attempt at collecting payments. If the farmer can prove the payments aren’t being made, they can make a claim. The largest benefit of the standard guarantee over the payment guarantee is the hedge against declining property value. If the value drops, the retiring farmer can still get 90% of the principal balance back in the face of default.
Both the payment and standard guarantee provide protection for up to 10 years.
Qualifying for the Land Contract Guarantee Program
Just like any other federal loan program, farmers must meet specific requirements. The largest of these requirements is the inability to secure any other type of financing. The guarantee program is only for those who would be left without the ability to start their farming career.
In addition, they must meet the following:
- You must be a beginning farmer. The USDA defines beginning farmer as someone who has not operated a farm for more than 10 years.
- If you aren’t a beginning farmer, you must be a socially disadvantaged farmer. This means a farmer that is part of a disadvantaged group, including African American or Asian American.
- You must actively work at the farm.
- You must not own any other farmland bigger than 30% of the average farmland for the area.
- You must be able to prove you have a clean credit history.
- You must be able to prove you can afford the payments.
The Loan Terms
The FSA sets strict loan term requirements. This is in an effort to make the transaction fair for everyone involved. The requirements include:
- It must have a fixed interest rate.
- The interest rate may not more than 3 points higher than the FSA’s rate on Direct Farm Ownership Loans
- The loan must be for no more than 20 years
- The new farmer must make a down payment of at least 5% of the purchase price
Only beginning or socially disadvantaged farmers may qualify for the guaranteed program. The FSA does not fund these loans. They do, however, fund their Direct loan program. Take a look at both options to see which one suits your needs the best.