Down Payment Loan Program
The Down-Payment Loan Program reflects the dual realities of scarce federal resources and the significant cash flow requirements of most new farm operations.It combines the resources of the Farm Service Agency, a beginning or socially disadvantaged farmer, and a commercial lender or private seller to enable beginning, minority, and women farmers to make a down payment on a farm or ranch.Since 1994, the program has assisted nearly 3,000 new farmers purchase farms.
To qualify, the borrower must be able to make a cash down payment of at least 5 percent of the purchase price.The loan amount from USDA’s Farm Service Agency (FSA) is equal to 45 percent of the purchase price of the land to be acquired, not to exceed its appraised value and not to exceed $500,000.With this $500,000 cap, the maximum FSA loan amount is thus $225,000.Note, however, that this is a cap on the amount of the loan, not a cap on the value of the land to be acquired.
The FSA loan term is 20 years, with an interest rate that is 4 percent lower than the regular FSA direct farm ownership loan interest rate, but no less than 1.5 percent.Hence, if the regular (and already subsidized) FSA direct farm ownership interest rate is 7 percent, the Down Payment loan interest rate will be 3 percent.Or, for instance, if the regular rate is 5 percent, the down payment rate will be 1.5 percent.
The remaining balance of the loan (50 percent) may be obtained from a commercial lender or a private party.FSA can provide a 95 percent federal guarantee to the commercial lender and the lender does not have to pay the normal guarantee loan fee.FSA can provide two types of federal guarantees to private landowners who sell to the beginning or socially disadvantaged farmer using a private land contract (see Land Contract Sales Guarantee section of this guide).
State “first time farmer” or “aggie bond” programs can also provide assistance that has the effect of lowering the interest rate on the commercial portion of a down payment loan or a participation loan.For an explanation of this option and a listing of 16 states that have state programs, see http://www.stateagfinance.org/types.html#aggiebond.
2008 Farm Bill Changes
The 2008 Farm Bill makes important changes to the Down Payment Loan Program.These changes include reducing the interest rate (which previously was 4 percent, regardless of what the regular rate was) and down payment requirements (which previously was 10 percent).The new Farm Bill also added socially disadvantaged farmers to the program which originally was solely for beginning farmers.
The Down Payment Loan Program was first established by the 1992 Agricultural Credit Act and implemented by USDA starting in 1994.The program has been amended in successive farm bills after that, including by Section 5004 of the Food, Conservation, and Energy Act (FCEA) of 2008, which amends Section 310E of Consolidated Farm and Rural Development Act of 1972.The revised Down Payment Loan Program is to be codified at 7 U.S.C. Section 1935.
The Down Payment Loan Program changes were self-implementing, so the new provisions were already in effect shortly after passage of the 2008 Farm Bill. The changes were later codified in a final rule published in the Federal Register on December 8, 2008. Funding levels for Down Payment Loans are established in the annual appropriations process, with the amount of money available for Down Payment Loans equal to 50 percent of whatever Congres appropriates for direct farm ownership loans in a given year. After April 1 of each year, if there are loan funds remaining that have not been used for Down Payment Loans, they may be made available for other types farm ownership loans for beginning farmers. For additional information, or to apply for a loan, go to the local FSA office serving the area where the farming operation is located.
Information about the special down payment loans for beginning and socially disadvantaged farmers and ranchers can be found on the Farm Service Agency website.
You can locate contact information for local FSA offices by clicking on your state at this website.
In cases where the beginning or socially disadvantaged farmer is not able to make the 5 percent down payment, two other options are available. One is a “participation loan” in which FSA provides a loan for up to 50 percent of the land value and a commercial lender provides 50 percent or more of the loan package. The interest rate for FSA portion of the participation loan is generally the same as the regular direct farm ownership loan program; the FSA loan term is 40 years. The other option is a regular FSA direct farm ownership loan program in which FSA provides 100 percent, 40-year financing.
Participation loans share an advantage with Down Payment loans in that, for a given amount of funding provided by Congress, two or three times more borrowers can be served than under the regular direct farm ownership program. Experience suggests, however, that new farmer success rates are higher when the beginning farmer builds the farming operation slowly and provides some of the equity upfront. From the dual perspective of “best bang for the taxpayer dollar” and highest probability of success, then, down payment loans have considerable appeal.