SW Financial Literacy
FAQ FSA Joint Financing
I have participated in the joint financing program twice on farm land purchases and have helped dozens of other producers on the traditional lender portion of financing. These answers are from my own experiences of being involved with this type of program and are the questions I answer the most and feel you need to know. My answers may not be consistent with all states, FSA offices, or individual lending officers. Always double check any questions or concerns with your assigned local lender who I have always had good experiences with.
What are the joint financing programs?
These two programs, Joint Financing Loan (50/50) and Down Payment Loan (50/45/5), are farm purchase lending programs for young and beginning farmers. The purpose of the programs is to allow for higher amounts of financing compared to traditional lending which accelerates their ability to get land bought early in their career. These programs require a significantly lower (or likely no) down payment necessary to get the land purchased and financed.
What is the difference between programs?
The 50/50 program allows you to finance 50% of the purchase through a bank or lender with FSA taking a second lien position and financing the second half of the purchase. If you have ownership in any other properties (including your house), FSA may include a lien there as well for additional collateral. FSA’s portion of the financing is termed out over 40 years.
The 50/45/5 program allows you to finance 50% of the purchase through a bank or lender, 45% of the purchase financed through FSA taking a second lien position, and 5% of the purchase being made by with a down payment. FSA will not take a second lien position on other properties you own. FSA’s portion of the financing is termed out over 20 years with a much lower interest rate than the 50/50 program.
What does a second lien mean? The bank or lender is given the first lien position in the transaction while FSA takes a second lien position. If you were to default on your loans and needed to sell the property, the proceeds from your land sale would go to the lender in the first position first to payoff the remaining loan balance. Once they have been made full, the lender in the second position can begin receiving proceeds to payoff their loan with whatever is left. Lenders rarely accept a second lien position as it becomes much risker to be paid in full when a loan is not paid.
What are the interest rates? FSA’s portion of the 50/50 program currently has an interest rate of 3.875% termed out over 40 years. FSA’s portion of the 50/45/5 program is 1.875% termed out over 20 years.
What does your traditional loan need to look like? FSA requires your traditional loan be amortized over 30 years (not the interest rate, just the payment schedule).
How does the program differ from traditional financing? With traditional financing there is typically only 1 lienholder. That loan allow for financing of around 65-70% of your purchase price, requiring a 30-35% down payment.
How do you become eligible? To become eligible, you need to have 3 years of filing a Schedule F on your tax returns or provide proof you have been managing a farm. If you graduated from college with an ag degree, then only 2 years of farming experience are needed. Talk with an FSA officer to verify your eligibility.
How long do you stay eligible? From the time you open your first loan, you have 10 years to participate in the program.
How do you get approved? FSA has an application to complete. Typically, you will not be able to start on the loan application until after you are able to present a signed purchase agreement to them.
What if you buy ground for over the $600,000 or $300,000 limit? You can by ground for above the limit if you are able to bring a larger down payment or get approved for additional funding from the traditional lender (i.e. $1,3M purchase with $700k financed through lender and $600k financed through FSA).
Can I rent the cash or share rent the ground out? No, the program is intended for farmers, not investors.
Can you payoff early? Yes, you can make early payments on the FSA
Can you use the funds again? Yes. Through the paydown of debt or if you were to sell the ground to pay off the note, you can tap into the funds again up to the maximum amount for each program if you are still eligible.
How long does it take to close the loan? The FSA portion of financing typically will take between 45 days and 3 months. I do not advice bidding on ground at an auction or property that is closing in 30 days as it is unlikely the financing will be completed in time.
Can you use these programs for a refinance? No, ground that you already own cannot be used in the program. This is why it is discouraged to sign the purchase agreement on ground that needs to close in 30 days it disqualifies that property from financing if you close on the ground with another lender. (The work around here is to have an agreement for a more flexible closing date or to have a family member, or other party, complete the initial closing. After a 3rd party completes the initial transaction, you can sign a new purchase agreement to buy the ground from them in a separate purchase. This results in 2 sets of closing costs but allows you to stay eligible for the programs.
Can you be removed from the program? It is possible you could be asked to leave the program based on large financial success. If FSA deems you are financially strong enough to no longer need their funds you may be asked to pay off the note or refinance with another lender to free up their funds for other applicants. Not following other government program requirements can also make you ineligible.
Can the property be used as collateral for a new loan? Unlikely. With the high leverage against the ground, FSA will not likely allow for additional financing against the property while they maintain the second lien position. Any readvance of your original lender loan would require FSA approval.
How do you stay in compliance? FSA will ask for updated financials on occasion to verify you are meeting their requirements. Stay in compliance with other government programs.
What other things should I be aware of?
-Government shutdowns and availability of funds can affect your ability to close these loans in a timely manner.
-You can do a 1031 exchange into a new property, however, you will need to pay off your current notes and secure new financing. If you are no longer eligible for FSA financing you would be done with the program.
For official answers to your questions and updated interest rates, please visit fsa.usda.gov and talk with your local lender.
Have a great week!
Grant
All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. Information provided is authentic to the best of my knowledge, and as such, is prone to errors and the absence of key details. The content of this blog is for entertainment and informative purposes and should not be seen as professional advice to finances or any other field.