Land Loan Process: Step-by-Step Guide

5 Minute Read

Hand holding pen filling out financial forms

Interested in expanding your farm operation or diversifying your investment portfolio? If you’re thinking about borrowing money for your next land purchase or refinancing an existing land loan, it’s a good idea to familiarize yourself with the land loan process before you apply for financing. 

In this article, we’ll review five tips to prepare for a future land purchase or refinance, and highlight information you need to start your land loan application. 

Identify Your Business Structure 

Because the structure of your farm or real estate investment affects your risk and personal liability, it can also carry implications when applying for financing. Common questions a land lender may ask you about the business structure of your operation or investment include: 

  • Who is purchasing or refinancing the land? 
  • Are there entities or trusts involved? 
  • Will all parties sign personally, or who do you intend to sign the loan and mortgage documents? 

Prior to a land purchase or refinance, it’s a good idea to consult with your accountant or attorney to determine the best way to structure your investment from a tax and legal perspective. If there are entities or trusts involved, you will need to have all formation and legal documents organized and available. 

Prepare Your Financial Documents 

Prepare a complete and accurate record of your financial information. A standard loan application typically requires applicants to include tax returns from the past three years and an updated balance sheet (a detailed list of all assets and debts for each applicant).

While not required, CPA prepared financial statements are beneficial. You should also be prepared to provide verification of any wage income and current statements for investment or retirement accounts. 

The financial documents required to start your loan application ultimately allow lenders to create the best loan structure for you with minimal risk. Key metrics land lenders look for in your financials include: 

  • Fixed Cost Structure – How does the farmland purchase or refinance affect your fixed costs per acre? 

If the new or restructured debt pushes your fixed costs (principal, interest and real estate taxes) higher than a typical cash rent in your area per acre, you will need to identify another source of income to subsidize the annual cash flow shortfall. 

Running scenarios using our affordability calculator is a good way to analyze if you can service new debt associated with a land purchase.

  • Loan Repayment Structure – If the land does not cash flow independently and multiple streams of income will be used for repayment, what are your options? 

The terms of your financing can be adjusted to fit your available cash flow. For example, you may want to make an annual payment based on the cash flow of the land, and a monthly payment from non-farm income sources for the remainder of the required debt service.

If you are able to cash flow a larger payment, you may want to take advantage of a lower interest rate and shorter repayment term. If not, a fixed rate with a longer term may be preferable. 

In our article about payment structures, learn how different scenarios impact your cost of ownership and cash flow.  

  • For those actively farming the land, working capital is a consideration. How does the land purchase or refinance affect your working capital (liquidity)?

Working capital is defined as your current assets minus your current (short-term) liabilities. As a rule of thumb, your working capital should be equal to 20-25% of your gross income. 

You can calculate what your working capital will be after a land purchase by subtracting the cash down payment you plan to make on the new farm. For a refinance, compare the new loan terms – including the rate and number of years to repay the loan – to your existing loan terms. Our loan payment calculator can help you run scenarios.

Compile an Operational Summary 

In addition to preparing your financial information, it is also beneficial to have a summary of your current operation or investments ready, including total acres (rented and owned), average yield, rent amounts and your projected cash flow. Providing this information to your lender will help them better understand the feasibility of your purchase or refinance and how it will impact your overall financial health.

Once all necessary information is gathered, you are ready to submit your land loan application. At this point in the process, a team of ag financial experts will evaluate the financial criteria and determine qualification. 

After the application is approved, the appraisal is ordered, and all title work requirements are reviewed. The average duration from application to loan closing is approximately 30 days, however this timeline can vary. 

Consider Options for Pledging Collateral 

The appraised value of the land is a key aspect considered by lenders when reviewing loan applications. Typically, the size of a land loan provided by a lender will range from 70% to 90% of its appraised value. That means you will need to make a cash down payment or provide additional collateral if you intend to borrow the entire purchase price of the land. 

Lending limits can be negotiated based on the details of your specific purchase, but you should be aware of your cash position and what you can reasonably contribute from your own assets without depleting all your working capital.

Refinance Existing Debt 

Finally, if you have existing debt, talk to your lender about the possibility of refinancing. This option typically makes sense for those who can reduce their current rate by at least 1%. 

By refinancing to a lower rate, you can lower your monthly payments by extending the loan or shorten your term in order to pay off the loan faster. 

In most cases, you’ll need to provide the same application information listed above in order to complete a refinance with a new lender. If possible, you will also want to obtain a copy of your current promissory note to uncover any pre-payment fees or restrictions with your current lender.

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