What Is the Farmers Home Administration?

The Farmers Home Administration Explained

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The Farmers Home Administration (FmHA) is a former government agency that financed businesses, housing, and facilities in rural areas. It was first authorized by Congress in 1946 to provide affordable housing for farmers and individuals who might not otherwise qualify for a mortgage.

The FmHA would insure the loans so lenders could lower the requirements to qualify for a mortgage. Today, these activities are carried out by the U.S. Department of Agriculture (USDA).  

Definition and History of the Farmers Home Administration

The Farmers Home Administration was a federal agency within the USDA. It was formed in 1946 as a result of Congress reorganizing the Farm Security Administration under the Farmers Home Administration (FmHA) Act. 

Congress’s stated mission for the FmHA was “to foster and encourage the family farm system of agriculture in this country.” To do so, the agency provided loans to farmers and ranchers for acquiring and improving real estate, equipment, and livestock, as well as for annual operating purposes. At one point, the FmHA and the Farm Credit System held over 40% of all agricultural loans in the U.S.

However, problems began to emerge with the FmHA over the years. By the 1980s, 40% of FmHA borrowers had become seriously delinquent on their loans. Meanwhile, the value of many of the assets, like land and equipment, dropped by as much as 20-30% in certain parts of the country.

Congress subsequently directed the U.S. Government Accountability Office (GAO) to conduct a study of the FmHA. In its April 1992 report, the GAO  found that as much as 70% of the FmHA’s portfolio was at risk due to delinquent borrowers. And this was even after the FmHA forgave $4.5 billion in debt from 1989-1990.

By September 1991, the FmHA had acquired over 3,100 farms from delinquent borrowers. The GAO concluded that the ineffective implementation of the FmHA’s loan servicing standards contributed to many of these problems. 

On December 8, 2010, President Barack Obama signed into law H.R. 4783, the “Claims Resolution Act of 2010,” which included funding for the agreements reached in the Pigford II lawsuit, also known as the Black Farmer’s settlement agreement. Pigford II is a class action lawsuit against USDA that alleges that USDA discriminated against African-Americans who applied for farm loans or other farm benefits between Jan. 1, 1981, and Dec. 31, 1996.

How the Farmers Home Administration Works Today

Today, the FmHA is known as the USDA Office of Rural Development. The agency currently has an $86 billion portfolio of loans and aims to administer nearly $16 billion in program loans, loan guarantees, and grants through its programs.

Borrowers can apply for USDA Rural Development home loans such as those for single-family housing. If eligible, they can receive 100% financing through an approved USDA lender. Rural Development loans are similar to Federal Housing Administration (FHA) loans in that both are intended to help low- and middle-income families achieve homeownership. However, there are some stricter criteria for borrowers to qualify for a USDA loan. For example: 

  • The borrower must show they can repay the loan, but their income can’t exceed 115% of the median income in that area. 
  • Borrowers should have a minimum credit score of 640, which is considered a “reliable” score by the USDA and can qualify them for automatic approval. 
  • A borrower’s debt-to-income (DTI) ratio, which is the amount they spend versus the amount of income they have coming in, should not exceed 41%.

In addition, the property must be located in an area determined to be rural by the USDA. 

Interested borrowers can check the USDA’s property eligibility map to see if they qualify.   

Pros and Cons of a USDA Loan

  • 100% financing available

  • Flexible terms

  • Refinancing available

  • Location restrictions

  • Guarantee fee included 

  • Income limits

Pros Explained 

  • 100% financing available: The USDA’s Single Family Housing Direct Loan, for example, offers 100% financing with no down payment required.
  • Flexible terms: Lenders and borrowers are free to negotiate any mutually acceptable fixed interest rate. Terms, however, must be 30 years.
  • Refinancing available: As long as your payments are current, you can refinance a USDA loan. 

Cons Explained

  • Location restrictions: Eligible borrowers must purchase a property that’s deemed to be in a rural area by the USDA. 
  • Guarantee fee included: While the USDA doesn’t technically require mortgage insurance for its Rural Development single-family direct loans, the agency does charge an annual guarantee fee. These fees are paid to USDA by the approved lender and are usually included in the homeowner's monthly loan payment.
  • Income limits: Borrowers cannot earn over 115% of the median income in the area they’re looking to buy a home. 

Key Takeaways

  • The Farmers Home Administration (FmHA) was created in 1946 to provide financing for homes, farms, and businesses in rural areas. 
  • It was one of the first programs aimed at providing affordable housing for individuals that would have a hard time qualifying for a conventional loan.
  • Problems began to emerge, and the GAO found that up to 70% of the FmHA’s loan portfolio was at risk due to delinquent borrowers.
  • Today, the FmHA is known as the USDA Office of Rural Development.
  • USDA loans provide many benefits to borrowers, including 100% financing and no down payment required. However, there are income limits, location restrictions, and fees.