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What Type of Home Loan Is Best for Farms and Homesteads?

James White

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A few years ago we bought a house in the rolling farmlands of Pennsylvania. After some initial research, I thought the USDA loan that's specific for buying rural land especially for agriculture was going to be best. But after I started comparing all loans, I realized just a local credit union's conventional loan would save me more money over the long run.

Of course, every person is going to have a different situation. However, before you decide what type of home loan is best for your needs, please make sure you ask around and get all the details on fees, interest rates, etc. before deciding.

Below you'll find some of my research on the different types of mortgages and when they might come into play.

USDA Loans

The United States Department of Agriculture (USDA) and the Farm Service Agency (FSA) offer loans for farms and homesteads. A USDA/FSA loan to purchase a farm is called Farm Ownership — Direct. There are also USDA/FSA guaranteed loans, which are insured.

USDA/FSA loans require either no or a low down payment. They are intended for low- to moderate-income people, so part of the application will require that you don’t exceed the income limit.

Currently, the interest rate for a USDA/FSA farm ownership loan is 3.875 percent. Bear in mind, though, that interest rates can vary each day and depending on your credit score. The interest rate is not firm until you receive the mortgage loan from your lender, and the rate can go up or down from the current rate. A higher interest rate means you will be paying more in interest. A lower one means you will be paying less in interest. 

The USDA loan also requires a fee that is added to your loan amount. You'll also have to pay mortgage insurance if you can't pay 20 percent of the farm upfront.

FHA Loans

The United States Federal Housing Administration (FHA) also has loans available for first-time home buyers. The FHA does not itself make loans, but guarantees loans that are made through regular lenders such as banks. Participating lenders display signs or other information indicating they participate in FHA loans.

FHA loans require less of a down payment than so conventional mortgages for a home. FHA loans, depending on the lender, can be 5 percent or less.

Even though that might be great news upfront, over the long haul you'll pay more since the interest rates are higher than conventional loans and you will have mortgage insurance, which is an extra $100+ per month tacked onto your bill for the life of the loan.

Conventional Loans

It's a common misunderstanding that conventional loans are only for those who can pay a 20 percent down payment. Not true. We actually only paid 10 percent and we could have gone done to 5 percent even! Keep in mind, how much down payment you can afford will determine your interest rate on the loan. So a 5 percent down payment may come with a 4.24 percent interest rate but with a 10 percent down payment you could secure a 3.75 percent interest rate.

If you do pay less than 20 percent down payment, you'll have to pay private mortgage insurance, but unlike USDA and FHA the mortgage insurance is not for the life of the loan. It's only until you can get 20 percent equity in your land. 

Loans and Grants

When you own a farm, equipment and other buildings are crucial and they are often very expensive. The USDA also offers a number of smaller loans for buildings and equipment.

They also offer grants. Grants are monies given for improvements, but the monies, unlike loans, never need to be paid back.

Considerations

Choosing what type of loan is best for you is only the beginning. There are several other things to think about when applying for a mortgage that can affect your finances for years to come.

• Down Payment and Interest Rates: The amount of the loan you take out and the interest rate will determine how much you pay each month. It’s a good idea to use a mortgage calculator to compare rates and amounts. Only you can figure out if it makes more sense to pay more in your down payment so you carry less debt to be paid off.
• PMI: In exchange for a low down payment, you may be required to pay a private mortgage insurance (PMI) cost every month. The PMI is required because, proportionally, USDA and FHA loan holders begin by owning no or little of their property. The insurance is to cover the lender in case of a default. In most cases, once you have made enough payments to own a certain percentage of the property, the PMI is removed from the monthly payment.
• Loan Term: Besides your down payment, how long your loan term is also impacts your interest rate and monthly payment. You definitely don't want to agree to a monthly payment you can't afford or stretches you to the limit. A 30 year term is pretty typical. 

There are several options for farm and homestead home loans that require no or low down payments. There are also smaller loans and grants available for improvements and equipment. Folks considering these loans should carefully compare available loans and rates.