How to Obtain Agricultural Loans

If you are into agriculture and have farm land as well as livestock then there is a high probability that at some point in time you might need an agricultural loan. There are several different types of agricultural loans available including specific loans for farm land, live stock, and any other agriculture related requirement. But the question is how to obtain agricultural loans?

If you require agricultural loans then there are certain aspects to consider before you can obtain the loan. The different aspects include:

Business Plan: As an existing farmer or a new farmer applying for agricultural loans, the first step is to prepare a detailed business plan that will throw light on the cash flow forecasts for the near future. The projection of the cash flow in your business plan will help your lender to understand how much loan you require and how much you are capable of paying back. You can pick up a copy of Business Plans for Agricultural Producers from the Texas Cooperative Extension Service for $1.25 and read through it to understand how to make a well-projected and detailed business plan for the loans.

Compare terms: There are several financial institutions that offer agricultural loans and each institution has its own rates and minimum loan amount. Before you apply for agricultural loans it is always a good idea to compare the various aspects of the loan like lending terms, minimum amount, scheduled payment period, marginal payment options and much more. You can compare the above information offered by banks, financial institutions, and Farm Credit Associations over the internet.

State Agricultural Finance programs: Most US states offer several state agricultural finance programs while some of the states offer at least one loan program. State agricultural finance or loan programs include everything from farmer loans to short-term farm land loans, disaster recovery loans, livestock loans, agri-business loans, equipment loans, seasonal loans, and much more. One of the popular state agricultural finance programs is the Aggie Bond Beginning Farmer Loan Program. This program is currently available in 17 states and helps new farmers to obtain loans at reduced rates for livestock, buying land, etc. You can find details on agricultural loans and state agricultural finance programs at the National Council of State Agricultural Finance Programs.

Commercial lenders: You can check the various offerings by commercial lenders like banks and financial institutions as well. There are several commercial lenders who specialize in different types of agricultural loans. There are approximately 2,500 farm banks all across US that offer agricultural loans at good interest rates. You can also check out with banks because they offer more farm loans than any Farm Credit System in the US.

U.S. Department of Agriculture (USDA) or Federal Government: Several types of agricultural loans are offered by USDA or the Federal government. You can pay them a visit if you are unable to get commercial credit or if you are unable to get the loan amount that you require for a specific agricultural requirement. There are several loan and farm land finance programs offered by the USDA Farm Service Agency.

The 4 Types of Real Estate Investor Financing

Throughout my real estate investing career, I’ve spent many dozens of hours speaking with lenders and potential financiers of my deals. With all the different types of loans and equity financing products available to investors these days, it’s important to have a good understanding of the benefits and the drawbacks of each, so you can choose the most appropriate financing option for your particular need(s).

Of course, given today’s credit situation, options are not only more limited than they were a couple years ago, but the definition of a “good deal” from a lender has changed as well. When I first started looking at financing for single family houses, I passed on a couple potential options that in hindsight were pretty good given today’s tight credit market; so it’s important to not only understand the types of financing that’s out there, but also which types are most prevalent and most easy to come by.

The point of this article is to define the four most common types of financing available to real estate investors; while there are, of course, more than four ways of financing real estate investments, most are a derivative — or combination — of the four we will discuss here.

1. Traditional Financing

This type of loan is generally done through a mortgage broker or bank, and the lender may be a large banking institution or a quasi-government institution (Freddie Mac, Fannie Mae, etc). The requirements to qualify for a loan are based strictly on the borrower’s current financial situation — credit score, income, assets, and debt. If you don’t have good credit, reasonable income, and a low debt-to-income ratio (i.e., you earn a lot compared to your monthly obligations), you likely won’t qualify for traditional financing.

Benefits: The benefits of traditional financing are low-interest rates (generally), low loan costs (or points), and long loan durations (generally at least 30 years). If you can qualify for traditional financing, it’s a great choice.

Drawbacks: There are a few drawbacks to traditional financing for investors, some major:

  • The biggest drawback to tradition financing is what I stated above — it’s difficult to qualify these days. Just a year or two ago, you could have qualified under a “sub-prime” variation of traditional lending, where income and credit were less of an issue; but given the sub-prime meltdown (many of these borrowers defaulting on their loans), these sub-prime options have gone away. So, unless you have good credit, income, and small debt, you’re better off not even bothering with trying to get traditional financing these days.
  • Traditional lenders generally require that at least 20% be put down as a down payment. While this isn’t always true, investor loans with less than 20% down can be tough to find via traditional lending these days.
  • As an investor, it can be difficult to deal with traditional lenders who don’t necessarily understand your business. For example, a house I closed on last week with traditional financing almost fell-through because the lender wouldn’t provide the funds until the hot water heater in the investment property was working. As an investor, it’s common that I’ll buy houses with broken hot water heaters (among other things), and I can’t generally expect the seller to fix this for me, especially when my seller’s are usually banks. In this case, I had to fix the hot water heater before I even owned the house, which is not something I want to do on a regular basis.
  • Traditional lenders take their time when it comes to appraisals and pushing loans through their process. It’s best to allow for at least 21 days between contract acceptance and close. As an investor, you often want to incent the seller to accept your offer by offering to close quickly; with traditional lending, that can often be impossible.
  • If the lender will be financing through Freddie Mac or Fannie Mae (and most will), there will be a limit to the number of loans you can have at one time. Currently, that limit is either 4 or 10 loans (depending on whether it’s Freddie or Fannie), so if you plan to be an active investor going after more than 5 or 10 properties simultaneously, you’ll run into this problem with traditional lending at some point.
  • There are no traditional loans that will cover the cost of rehab in the loan. If you plan to buy a $100K property and spend $30K in rehab costs, that $30K will have to come out of your pocket; the lender won’t put that money into the loan.

2. Portfolio/Investor Lending

Some smaller banks will lend their own money (as opposed to getting the money from Freddie, Fannie, or some other large institution). These banks generally have the ability to make their own lending criteria, and don’t necessarily have to go just on the borrower’s financial situation. For example, a couple of the portfolio lenders I’ve spoken with will use a combination of the borrower’s financial situation and the actual investment being pursued.

Because some portfolio lenders (also called “investment lenders”) have the expertise to actually evaluate investment deals, if they are confident that the investment is solid, they will be a bit less concerned about the borrower defaulting on the loan, because they have already verified that the property value will cover the balance of the loan. That said, portfolio lenders aren’t in the business of investing in real estate, so they aren’t hoping for the borrower to default; given that, they do care that the borrower has at least decent credit, good income and/or cash reserves. While I haven’t been able to qualify for traditional financing on my own due to my lack of income, portfolio lenders tend to be very excited about working with me because of my good credit and cash reserves.

Benefits: As mentioned, the major benefit of portfolio lending is that (sometimes) the financial requirements on the borrower can be relaxed a bit, allowing borrowers with less than stellar credit or low income to qualify for loans. Here are some other benefits:

  • Some portfolio lenders will offer “rehab loans” that will roll the rehab costs into the loan, essentially allowing the investor to cover the entire cost of the rehab through the loan (with a down-payment based on the full amount).
  • Portfolio loans often require less than 20% down payment, and 90% LTV is not uncommon.
  • Portfolio lenders will verify that the investment the borrower wants to make is a sound one. This provides an extra layer of checks and balances to the investor about whether the deal they are pursuing is a good one. For new investors, this can be a very good thing!
  • Portfolio lenders are often used to dealing with investors, and can many times close loans in 7-10 days, especially with investors who they are familiar with and trust.

Drawbacks: Of course, there are drawbacks to portfolio loans as well:

  • Some portfolio loans are short-term — even as low as 6-12 months. If you get short-term financing, you need to either be confident that you can turn around and sell the property in that amount of time, or you need to be confident that you can refinance to get out of the loan prior to its expiration.
  • Portfolio loans generally have higher interest rates and “points” (loan costs) associated with them. It’s not uncommon for portfolio loans to run from 9-14% interest and 2-5% of the total loan in up-front fees (2-5 points).
  • Portfolio lenders may seriously scrutinize your deals, and if you are trying to make a deal where the value is obvious to you but not your lender, you may find yourself in a situation where they won’t give you the money.
  • Because portfolio lenders often care about the deal as much as the borrower, they often want to see that the borrower has real estate experience. If you go to a lender with no experience, you might find yourself paying higher rates, more points, or having to provide additional personal guarantees. That said, once you prove yourself to the lender by selling a couple houses and repaying a couple loans, things will get a lot easier.

3. Hard Money

Hard money is so-called because the loan is provided more against the hard asset (in this case Real Estate) than it is against the borrower. Hard money lenders are often wealthy business people (either investors themselves, or professionals such as doctors and lawyers who are looking for a good return on their saved cash).

Hard money lenders often don’t care about the financial situation of the borrower, as long as they are confident that the loan is being used to finance a great deal. If the deal is great — and the borrower has the experience to execute — hard money lenders will often lend to those with poor credit, no income, and even high debt. That said, the worse the financial situation of the borrower, the better the deal needs to be.

Benefits: The obvious benefit of hard money is that even if you have a very poor financial situation, you may be able to a loan. Again, the loan is more against the deal than it is against the deal-maker. And, hard money lenders can often make quick lending decisions, providing turn-around times of just a couple days on loans when necessary. Also, hard money lenders — because they are lending their own money — have the option to finance up to 100% of the deal, if they think it makes sense.

Drawbacks: As you can imagine, hard money isn’t always the magic bullet for investors with bad finances. Because hard money is often a last resort for borrowers who can’t qualify for other types of loans, hard money lenders will often impose very high costs on their loans. Interest rates upwards of 15% are not uncommon, and the upfront fees can often total 7-10% of the entire loan amount (7-10 points). This makes hard money very expensive, and unless the deal is fantastic, hard money can easily eat much of your profit before the deal is even made.

4. Equity Investments

Equity Investment is just a fancy name for “partner.” An equity investor will lend you money in return for some fixed percentage of the investment and profit. A common scenario is that an equity investor will front all the money for a deal, but do none of the work. The borrower will do 100% of the work, and then at the end, the lender and the borrower will split the profit 50/50. Sometimes the equity investor will be involved in the actual deal, and oftentimes the split isn’t 50/50, but the gist of the equity investment is the same — a partner injects money to get a portion of the profits.

Benefits: The biggest benefit to an equity partner is that there are no “requirements” that the borrower needs to fulfill to get the loan. If the partner chooses to invest and take (generally) equal or greater risk than the borrower, they can do so. Oftentimes, the equity investor is a friend or family member, and the deal is more a partnership in the eyes of both parties, as opposed to a lender/borrower relationship.

Drawbacks: There are two drawbacks to equity partnership:

  • Equity partners are generally entitled to a piece of the profits, maybe even 50% or more. While the investor doesn’t generally need to pay anything upfront (or even any interest on the money), they will have to fork over a large percentage of the profits to the partner. This can mean even smaller profit than if the investor went with hard money or some other type of high-interest loan.
  • Equity partners may want to play an active role in the investment. While this can be a good thing if the partner is experienced and has the same vision as the investor, when that’s not the case, this can be a recipe for disaster.

Construction Factoring – A Different Form of Bank Financing

Construction financing
Construction financing can be defined as the funding process that is required while paying for a construction during the construction period. This type of financing can also include the payment of a land, for its improvement, if necessary. The full amount of this payment is usually arranged much in advance before the process of construction takes places. The loan for construction financing is usually advanced by draws as the construction process achieves its preset milestones. This is an important aspect in any construction project and understanding the system of financing and its relation to the construction business is of extreme importance.

Following are some of the common sources which offer construction loans:

Commercial Banks:

Commercial Banks, which are believed to be the biggest construction lenders on commercial or multifamily projects, offer limited number of long-term loans and single-family short-term loans. They also make short-term to the REITs or Real Estate Investment Trusts.

Savings and Loan Associations:

These are the largest of all the loan providers, for both the construction as well permanent or long term single family housing loans. These associations are also the ones to make maximum construction loans to the multi-family housing projects like apartments and condominiums.

Mutual Savings Banks:

The mortgage investments of these financial bodies generally focus on permanent single family mortgages. They usually offer limited number of loan. However they do offer long-term loans to investment trusts and mortgage bankers which in turn make the construction loans.

Mortgage Banking Companies:
They provide good number of loans for construction as well as land development but act as intermediaries between lenders and borrowers.

Life Insurance Companies:

These companies make the minimum number of temporary construction loans as they mainly concentrate on long-term commercial and multi-family loans.

Real Estate Investment Trusts:
The REITs offer mortgages on long-term commercial and multifamily projects but their construction loans are limited in number.