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Should I co-sign on my child’s farm loan?

Erica Louder for Progressive Forage Published on 01 March 2020
Parents and money

According to a study completed by Legal & General Group, the so-called “Bank of Mom and Dad” was the seventh-largest lender in the U.S. in 2018. They estimated this parent patronage program accounted for $47.3 billion in lent dollars.

This is more than a current cultural phenomenon – parents have been lending money to their children for decades. There is nowhere this is truer than in the agricultural world.

Agriculture is patrilineal. Farms celebrate for reaching their fifth, sixth and even seventh generation. Most of us want to pass our farms to our children, and that almost always means joining the ranks of the “Bank of Mom and Dad.”

Today, many parents realize the family farm isn’t able to support more than one family. If children want to return to the farm, the operation often needs to expand. Many families have children purchase property separately and work it into the family farm. In these situations, co-signing on a child’s farm loan is common.

That leads to the question: Is co-signing on your child’s farm loan a good idea?

The consumer financial world would tell you to proceed with caution. Everyone’s favorite financial expert, Dave Ramsey, is frank with his advice. “When it comes to co-signing, some of you think your child is the exception. But there is a reason the lender is cautious. My advice: Don’t co-sign. Never co-sign. One hundred percent of the time you co-sign, it’s stupid. There are no exceptions. You’re not the exception. Don’t do it. It’s stupid. Co-signing is stupid.”

We could argue that agriculture may be an exception to this rule, yet Dave is making his point pretty clear. Other financial experts aren’t quite as frank. J. David Aiken, extension water and agricultural law specialist for the University of Nebraska, says, “Parents co-signing loans for their children is common in agriculture. Lenders are more willing to make the loan to a beginning producer if the parents co-sign and promise to repay the loan if the younger producer cannot. If the child turns out to be an effective producer and manager, the risk of the parents being on the hook for the unpaid loan balance is pretty manageable.”

Like with all things in agriculture, the word “if” becomes a critical qualifier when making a decision. Here are some questions to ask before putting your name on the dotted line.

Questions to consider before signing

  • Has your child explored all their borrowing options? Just because your child does not qualify for a farm loan from a commercial bank doesn’t mean they won’t qualify anywhere. The USDA’s Farm Service Agency loan program was set up for such scenarios. They have programs that allow beginning farmers to borrow, even if they don’t meet traditional lending guidelines. They will lend up to $600,000 for a direct farm purchase or in cooperation with another lender in a joint financing situation. They also will guarantee loans made by a qualifying lender for up to $1.8 million, mitigating the risk to the primary lender. In addition to the FSA loans, most Farm Credit Associations and some commercial banks have lending programs with lower guidelines that help farmers get started. Alone, or together with the FSA, these products may be great options that don’t require a parent co-signer.

  • Have you considered the location of the property? If you do agree to co-sign on your child’s farm loan, you need to play an active role in seeking out the property they will purchase. Ask the question: How does this property work in your operation? If needed, could you step in and operate the farm without much difficulty? Or could the property be sold or leased to generate cash to meet the debt obligation? Agricultural finance expert David Kohl advises farmers to be realistic when purchasing ground for expansion. He says, “Don’t buy the neighbors’ farms just because it is close, and don’t purchase a farm across the county just because it’s cheap. Location and expense are major factors to consider – but not the only factors.”

  • How could this loan impact your credit? If the lender reports to the credit bureau, the co-signed loan will appear on your credit report, not just your child’s. Lori Trawniski, director of banking and finance at AARP’s Public Policy Institute, says, “Some people incorrectly believe that co-signing is like giving a reference. In fact, a co-signer is a borrower but without the advantage of property ownership. They are equally obligated to repay that debt.” That means if your child falls behind on payments or is late on payments, both credit scores will take a hit.

  • Have you considered being a co-borrower? Many mistakenly believe a co-signer and a co-borrower to be the same thing. A co-borrower applies for the loan alongside the primary borrower, and both parties are expected to make payments. A co-borrower will sign on legal documents and is included on the deeds or mortgage for the property. A co-signer, on the other hand, is “a guarantor, without whom the loan will not be approved,” says financial expert Ogechi Igbokwe, “a co-signer guarantees that the loan will be repaid.” However, they have no ownership or interest in the property being purchased. Being a co-borrower gives you legal ownership of the property; co-signing does not.

  • Have you considered the impact on your repayment capacity? While the agreement you maintain with your child may be that you will not make any loan payments, legally speaking, you are obligated on that loan. From a lender’s perspective, this additional payment lessens your capacity or ability to repay other loans. Some lenders may not total in a co-signed loan with your debt obligations, but others may include it. Your child’s farm loan may limit your ability to borrow in the future for personal or business reasons.

  • Have you considered the future financial position? Even if your current repayment capacity is sufficient to cover any payment shortfalls, consider what it might be in the future. Agriculture is cyclical in nature. Today’s financial positions may be a lot different than tomorrow’s. As a word of caution, Aiken says, “Parents may be asked to co-sign or guarantee payment of a child’s debt when the younger producer can’t repay a loan. This is often a very difficult situation and rather different than co-signing a loan from the outset. No one wants to be part of losing the family farm or ranch, but if the loan guarantee isn’t part of a financial turnaround plan that has at least a fighting chance of success, don’t sign the guarantee unless you absolutely don’t need the money for your own retirement.”  end mark

ILLUSTRATION: Illustration by Kristen Phillips.

Erica Louder is a freelance writer based in Idaho.