Borrowing money for a farm is a lot different than borrowing money for a home to live in. While you still take out a ‘mortgage’ to buy a farm, it’s not your traditional mortgage that you’d get for your home. This is agricultural lending and it looks a lot different than traditional mortgage lending.
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Farming is Risky Business
Agricultural lenders are at a distinct disadvantage simply because of the riskiness that farming poses. There are numerous factors that could affect a farm’s profits including:
- Weather
- Market prices
- Demand
- A farmer’s abilities
- Pests
- Diseases
- Irrigation
A farmer’s experience determines how well he or she handles the situations thrown at them. An inexperienced farmer could lose everything as a result of any of these factors whereas an experienced farmer may have a fighting chance at keeping the farm alive and productive. While there are farm loans for beginning farmers, it’s much easier for lenders to give loans to those that have the ability to weather the storm, so to speak.
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What Lenders Look At
Just like with residential mortgage lending, agricultural lenders need to look at the following factors:
- Character – Does the farmer (borrower) have the ability to repay the loan? Does the farmer have a history of paying bills on time? Is the farmer financially responsible?
- Capacity – Does the farmer have the money to repay the loan or the capacity to earn the money to repay the loan?
- Capital – Does the farmer have any of his or her own money invested in the farm? Without his or her own money invested, it could raise the risk of default. Farmers with a vested interest in the farm are more likely to make things work no matter how tough it gets.
- Collateral – What are you putting up for the loan? In other words, what does the bank get if you default on your loan? What is the market value of the farm and the crops?
- Conditions – What are the conditions of the agricultural market? Does the farmer have the ability and know-how to work around the conditions to stay profitable?
Agricultural lending is more than about whether a borrower qualifies for the loan. The lender must look at the future and determine how the borrower (farmer) is likely to do. While the lender cannot predict the weather, presence of disease, or market prices, they can see how a farmer will react to each of these conditions in order to determine how likely a borrower is to default.
Agricultural lending is a combination of all of these factors. No lender should put emphasis on any of the conditions, but rather look at the picture as a whole. If a lender focuses solely on the collateral, for example, they expect you to fail. But most lenders will require you to have some type of capital, so you can expect that across the board – it’s like having a vested interest or a reason to make your payments.
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