Getting a mortgage to buy the farm

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“Buying the farm” isn’t a bad thing if you’re actually buying it. You can learn the basics of farm loans and agricultural mortgages — such as criteria for borrowing, tax implications and interest rates — whether purchasing for business or as a second home. In this interview, Calum Turvey, Ph.D, professor of agricultural finance and director of graduate studies at Cornell University, discusses lending practices and trends for these types of loans.

What are the main differences in lending practices between traditional mortgages, farm loans and agricultural mortgages? What criteria must be met to apply for an agricultural mortgage?

In most situations, an agricultural mortgage is directly related to the purchase of a farm. But increasingly, these loans can be made to purchase residential and other properties in rural areas. A farm loan is simply an operating loan or line of credit applied to the acquisition of farm inputs (including labor), machinery and inputs, normally with a shorter-term duration than a 20- or 30-year mortgage. For a mortgage, the borrower will generally be older than 18 and engaged in production agriculture. Equity will normally be about 25 percent or higher, but special conditions apply through the Farm Services Agency of the USDA for young and beginning farmers, women and underrepresented minorities. Assistance usually comes with loan guarantees.

Some of our readers have second homes. Is it possible to obtain an agricultural mortgage for a second home?

Yes, in fact many urban dwellers receive a second mortgage to purchase hobby or commercial farms. However, the second home would have to be in a rural area to qualify if the loan is obtained from the Farm Credit System. If the loan is made from a commercial bank, then whether the loan is an agricultural loan will depend (on) if an FSA guarantee is required. This would probably not be granted in any case on a second residence, but anything is possible. Equity from the first home could be used to secure the second in the normal way.

Does an agricultural mortgage have different tax implications for the borrower?

No, the treatment of interest on a rural mortgage is the same as the interest deduction on the principal residence. However, if the mortgage is on a working farm, the farm will be registered as a business and interest is deducted as a business expense rather than a credit. There is no special tax treatment for “agriculture” over nonagriculture. If the agricultural property is a farm, the house will be prorated and standard or itemized deductions will be applied to Schedule 1040 A, while the working part of the farm will be itemized in the usual way on a Schedule F.

What are the necessary land size and mortgage amounts for an agricultural mortgage?

There is no upper limit to the size of loan for a farm. If the agricultural mortgage is for a house in an agricultural zoned rural area, then any minimum size will qualify.

Can you tell us the general trend in farm loan rates compared to residential mortgage rates over the past five to 10 years?

This is a bit tricky. Residential mortgage rates, including rates on agricultural mortgages originating at commercial (deposit-taking) banks, are largely based on deposit rates and federal funds rates. They are competitive although rather than pricing through Fannie, there is a GSE called Farmer Mac to deal with secondary markets. Loans from the Farm Credit System, on the other hand, are based on bonds issued by the Farm Credit Funding Corporation. These bonds are typically only a few basis points above Treasuries of the same duration and are considered risk-free because of an implicit guarantee. The Farm Credit System is also a GSE, or government-sponsored enterprise. These were downgraded by Standard & Poor’s two days after they downgraded Treasuries, but the downgrade was unwarranted, in my opinion.

How have recent Federal Reserve actions on monetary policy affected agricultural mortgage and farm loan rates?

The Federal Reserve actions on quantitative easing has had the same effect on commercial loans as agricultural loans in that a near-zero cost of funds means lower interest rates. Because Farm Credit System rates are determined by the issuance of bonds, the impact of reserve actions has been the same as the impact on Treasuries, at least for short-term notes. But longer durations may not have been affected by (quantitative easing) because it is not a permanent action.

Special thanks to Calum Turvey, Ph.D., W.I. Myers professor of agricultural finance, director of graduate studies Cornell University, editor of Agricultural Finance Review.