Deciphering the VA Lender’s Handbook Chapter 7 Part 19
Just like any other type of residence, farms have their fair share of interested borrowers who may want to take advantage of their VA loan benefits to purchase them. The VA allows borrowers to use their VA loan benefits to purchase a farm so long as the borrower intends to live on the farm. From the VA Lender’s Handbook: “A loan for the purchase, construction, repair, alteration, or improvement of a farm residence which is occupied or will be occupied by the veteran as a home is eligible for guaranty.” This eligibility, however, is extremely specific. The VA is very particular in not allowing the loan to cover the nonresidential value of the farm land (in excess of the homesite), nor the barn, silo, or other outbuildings, even those necessary to the operation of the farm, nor any of the farm equipment or livestock.
There’s a (sort of) exception to this specific eligibility, however. If the borrower has already purchased the land, and is making payments on it, the VA loan for the construction of the farm residence can also be used to pay off the lien on the land so long as the reasonable value of the land is at least equal to the cost of the lien. Clarification from the VA: “A portion of the proceeds of a loan to construct a farm residence on encumbered land owned by the veteran may be used to pay off the lien or liens on the land only if the reasonable value of the land is at least equal to the amount of the lien(s).” Buying and beginning a new farm operation is an extremely expensive proposition, and while the VA can help make a portion of it more affordable, there’s going to be a lot that the veteran will need to figure out how to take care of on their own.
When a lender underwrites a loan for a residential farm homesite, one of the first questions he or she needs to be answered is this: Is the income the veteran is using to qualify for the loan going to come from the farming operations? The answer to this question greatly determines how the lender handles the loan. If the borrower is planning on using income from the farm as their qualifying income, they will be treated very similar to a borrower using “self-employment income” (which we covered in Chapter 4 of this series). The requirements for those who are self-employed can generally be applied to those hoping to use farm income for their mortgage. However, in many cases the borrower is going to be a new farmer or opening up a new farm operation. If that is the case, the loan must be handled differently from an experienced farmer.
If the farmer is a new farmer, or the farm operation is a new operation, the lender will need to get the veteran’s proposed plan for the farm. This plan needs to include the number of acres dedicated to each crop, the amount of livestock they’ll have, and other things needed to estimate both the income and expenses of the farm. The new farmer will also have to provide a written statement that they either already own or are planning to purchase the necessary equipment to operate the farm. If the borrower needs to purchase them, more details on cost and repayment will be needed. Additionally, a VA-appointed farm appraiser or another expert is required to estimate the income and expenses of the farm. Last, the new farmer will need to provide a copy of a commitment from a lender for an operating line of credit to cover operating expenses of the farm.
For an experienced farmer that is continuing the same farm operation, the VA provides the following: “If the veteran finances operations out of an operating line of credit, obtain
records of advances from, payments to, and carryover balances on the operating line of credit for the last 3 years (or additional periods if needed to demonstrate the stability of veteran’s operation). Analyze the reasons for any build-up of operating debt.”