Few people are able to build or a new home with no financing, so if barndominiums have piqued your interest for their hardy design, rural aesthetic, and affordable building costs you’ll need to be fully informed on where to find a lender and what their requirements are.
Knowledge is power, so having this information in your arsenal will increase your productivity with your builder or real estate agent and expedite the whole process.
You’ll save a substantial amount of money on materials and labor by choosing a barndo rather than a traditional stick-built structure, and that frees up funds for your favorite design choices, but knowing your lending options will inform exactly how much wiggle room you have when making those design and building decisions.
How do Lenders Classify Barndominiums?
While designers and builders classify a barndominium as a metal structure with a barn-like exterior/construction and interior home amenities, lenders rarely make this distinction from a regular home build. The truth is that a loan is a numbers game with a lender, and they are uninterested in whether you want to build a barn home or a post-modern structure on the side of a waterfall, or anything in between.
As long as the home you’re building meets code for a permanent residence, what a lender looks at – instead of the barndo distinction – is a systematic list of qualifications to determine whether your desired home will qualify for a construction (or mortgage, for pre-built barn homes) loan. This list is based on numbers and statistics, not your home’s style.
What Do Lenders Look At?
- Your creditworthiness: Obviously this is the first thing a lender will look at, and it’s the first step to a pre-approval before you even meet with your builder. The lender will evaluate your credit history, income, and debt to income ratio to determine your building budget, and your preapproval is the budget your builder will go off of in design meetings.
- Location: What a lender is willing to put forth toward a specific home depends on recent sales in your area, based on an appraisal. For instance, if you have property in an area with homes comparable to the one you want to build that have sold for $500,000.00, that’s what the bank will be willing to pay for the home you’d like to build. When it comes to barndominiums, this is where things become tricky. Barndominiums are still rare, and appraisers occasionally don’t know how to value the building.
- Your plan, desired fixtures, amenities, and finishes: Lenders want a full list of your home’s selections (or a general ballpark, anyway) to help them value it. For example, it will cost more to add hardwood floors than it would carpet, granite countertops than laminate, or marble bathroom floors than laminate. These are important considerations for any lender, as they can drastically change the value of a home, and therefore the amount the lender is willing to put forth.
What Types of Loans are Available for Barndominiums?
Because lenders don’t classify barndominiums differently than other homes, your options are pretty broad if you live in an area with comparable homes for lenders to evaluate against. Here are some of the main types of loans available to you if you want to explore a barn home:
Most lenders offer conventional loans, which involves a certain percentage paid down by the buyer up front (usually between 3 and 20 percent) while the lender pays the rest to the builder in good faith that you will pay monthly principal and interest payments for a set period of time, usually between 15 and 30 years. If you’re buying a pre-built barndo, the lender will pay the current homeowner instead.
If you own a property outright you can use its value as collateral for a down payment. The details and terms of a conventional loan vary from lender to lender, but local banks and credit unions, as well as national lenders all, offer this option.
With construction home loans, there are two types available:
- Construction-to-permanent: This is usually preferred by homeowners. This loan allows you to choose a builder, bring his plans and estimate to the lender, and close the loan before construction begins. Usually homeowners pay interest only until the construction process is finished while banks check in with the builder to release payments according to the level of completion every 1-3 months. Once the home is complete, the homeowner begins paying regular mortgage payments including principal, interest, and escrow.
- Construction-only: This type of loan is exactly as it sounds: It only finances the construction of the loan. Once the building is complete, you will need to shop around for another loan to refinance the construction as a regular mortgage. This option requires two closings, two application processes, and two separate loans, but the benefit presents itself in that you’ll have more flexibility to shop around for your mortgage on your second closing.
A USDA loan is a government-backed loan offered by many banks and private lenders that requires $0 down with government-regulated interest rates and a 15 or 30-year term. USDA stands for the United States Department of Agriculture, and they’re only available in certain rural areas, so check with your lender to see if your property is in an eligible zone. If so, you could use a USDA loan to finance your barndominium with $0 down if your plan appraises for its cost.
FHA is another government-backed loan offered by both private lenders and banks. The qualifications are determined by the government and underwriters and are designed to help those with below-average credit scores secure a home loan. Standard down payments for this type of loan are 3.5% with strict debt-to-income ratios, but if you have cash or equity, you can find some wiggle room in cost.
If you’re in the military or are a veteran, you can finance your barndominium with no down payment through a VA loan. They offer low-interest construction and purchase loans for homeowners, and their credit requirements are more lenient than most because it’s a service to our military and veterans.
Where to Look for a Barndo Loan
The best place to start looking for a barndo loan is your local bank, but make sure you shop around for lower interest rates, better terms, and different types of loans before making a selection. Local banks will probably be more likely to cater to your unique plans for a barn home, but don’t discount the following sources:
Rocket Mortgage
Rocket Mortgage is known for being convenient. The process takes place mostly online and on the phone, and their rates are competitive. They’re a good place to start comparing rates and options, and since they’re nationwide they’ve handled most unique requests before and will be able to give you a lot of good information from the get-go. They finance new construction as well as home purchases, so whether you’re building or buying a barndominium they can help you out.
Wells Fargo
Wells Fargo is known for its construction loans. They work with a long list of builders all over the country and have their new construction loans down to a science. Make sure your builder is Wells Fargo approved, though, before you choose them for your construction loan. Their builder approval process is rigorous and every builder they work with has a long list of qualifications.
Atlantic Bay
Atlantic Bay is an award-winning private mortgage company that offers USDA construction loans, low down payment traditional loans, and FHA loans. These are all options for a barndominium, and a local mortgage officer will be able to walk you through the appraisal process.
Local Banks
Local banks are known for their excellent customer service and personable options. They rarely sell their loans, so you’ll likely be working with the same institution for the duration of your loan, and you’ll be dealing with the same customer service representatives time after time. Local banks often have their own unique loan programs, so it’s a good idea to meet with several to see what your options are with each.
Farm Credit Union
If you plan to do what many do with a barndominium, which is to add unconventional spaces inside your barndo (like a barn, shop, large machinery storage, etc.), you might want to look here first. Farm Credit Unions specialize in rural structures and will have their own terms and options for such buildings that cater to your specific needs. Farm credit unions are also a great place to turn if you’ve run into a financing snag at another lender. Credit unions are member-owned and often have less rigorous lending standards than local or even national banks.
