If you need a farm loan, but you have bad credit, you are not out of luck. The FSA has a program that was made for farmers just like you. It’s called the Guaranteed Farm Loan. It provides funds for new farmers to purchase farmland and/or start operations. You can go through the government or a private lender. The route you take determines the type of loan you’ll receive.
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Going directly through the government, you’ll get a
Direct FSA loan. This has slightly stricter requirements than the Guaranteed FSA Loan, which you obtain from private lenders. The Direct Loan is for farmers that cannot qualify with an individual lender. If you do have the qualifications, you may have access to more funds from the Guaranteed Program. We discuss this in detail below.
Bad Credit Doesn’t Matter
If you have bad credit, you shouldn’t give up your dream of becoming a farmer. The guaranteed loan provides lenders with a backup should you default on the loan. In other words, the FSA/USDA will pay the lender back a portion of the defaulted funds. This allows lenders to give you more options regarding obtaining financing to purchase a farm.
However, you should keep in mind that lenders might have stricter requirements regarding the loan because of the bad credit. The
FSA/USDA have their guidelines, which are minimal. Then the lender has his own guidelines to add to it. Lenders are at their own discretion regarding what requirements they want to add. They do this to reduce the risk of taking on a bad loan. A few of the requirements may include an increased down payment, lower debt ratio, or even a co-signer.
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Come Up With Compensating Factors
Perhaps one of the best things you can do when you need a farm loan with bad credit is have compensating factors. Lenders like to look at the big picture. They don’t focus on one detail. For example, you may have a low credit score, but have a very low debt ratio. That low debt ratio offsets the risk of the low score, in some cases.
Lenders want to know that you are not a big risk overall. When you present your case to a lender, you want at least one or more of the following:
- Good credit score (over 680 is usually best)
- Low debt ratio (this varies by lender)
- At least 10 years of history in farming
- Proof that you have the desire/motivation to own and operate a farm
- Proper education to own/operate a farm
Of course, lenders will look at
each of these factors differently. Shopping with different lenders will likely give you different answers. One lender may be just fine with the bad credit while another is not willing. It takes shopping around and maximizing your compensating factors to help you get the best deal available today.
If all else fails, consider taking on a co-applicant that has better qualifying factors than you. The lender cannot use a co-signer’s higher credit score, as the lower one usually prevails, but if they have other compensating factors, it may help your chances.