Can Barndominiums Be Financed?

A barndominium blends functionality and residential comfort, typically a metal building shell converted into a living space. These structures often integrate a barn, workshop, or garage area with the home, offering versatility. While financing a barndominium is possible, the process often differs from traditional home loans due to their unique construction and classification. Understanding these differences is important for prospective owners.

Financing Options for Barndominiums

Financing a barndominium often begins with a construction loan, which is specifically designed for new builds. These loans disburse funds in phases, directly tied to the progress of construction, ensuring that money is released as specific milestones are met. The interest on these loans is typically paid only on the funds that have been disbursed, rather than the full loan amount, during the construction period. Many construction loans are structured to convert into a permanent mortgage once the building is complete and a certificate of occupancy is issued.

For existing barndominiums, or once a construction loan has converted, conventional mortgages become a viable option. However, securing a conventional mortgage for a barndominium can present unique appraisal considerations. The lack of comparable sales data for these distinctive properties in many areas can make it challenging for appraisers to determine market value, potentially requiring a higher down payment, such as 10% to 20% or more, depending on the lender and property specifics. Lenders generally expect these properties to adhere to established guidelines from entities like Fannie Mae or Freddie Mac for securitization.

Government-backed loans, including those from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA), may also be available under specific conditions. FHA loans, for instance, can be more restrictive for non-traditional properties, requiring the barndominium to meet strict health, safety, and structural soundness standards, often demanding a higher level of traditional residential finishes. VA loans similarly require properties to meet Minimum Property Requirements (MPRs) and must be suitable for year-round occupancy, focusing on owner-occupied residences.

The USDA loan program can be an option for barndominiums located in eligible rural areas, catering to low-to-moderate income borrowers. These loans often feature favorable terms, including no down payment requirements, but the property must adhere to USDA’s specific housing standards. Some USDA programs can even facilitate a single-close construction-to-permanent loan, streamlining the financing process for new builds. Personal loans or bridge loans offer less common, short-term solutions, typically for smaller scopes or to bridge financial gaps. These options often come with higher interest rates, potentially ranging from 7% to 36% Annual Percentage Rate (APR) based on creditworthiness, and are usually unsecured, meaning they do not require collateral.

Lender Requirements and Preparatory Steps

Before applying for a barndominium loan, borrowers must meet eligibility criteria and gather documentation. Lenders typically look for a FICO credit score of at least 620-680 for conventional loans, with higher scores often resulting in more favorable interest rates and terms. A stable employment history, generally two years with consistent income, is also a common requirement, while self-employed individuals typically need two years of tax returns to verify income.

Debt-to-income (DTI) ratio is another important metric, with lenders often preferring a DTI below 43-50%. This ratio compares monthly debt payments to gross monthly income, indicating a borrower’s capacity to manage additional debt. Construction loans frequently require a down payment of 20-25% of the total project cost, while conventional mortgages for existing barndominiums may require 10-20%, depending on the lender’s risk assessment and the property’s appraisal.

Regarding the property itself, detailed building plans are essential, including professional blueprints, engineering plans, and comprehensive specifications. These documents must clearly outline living spaces, utility connections, and structural integrity, often requiring stamps from a licensed architect or engineer. For new construction, lenders typically mandate the use of a licensed and reputable general contractor with demonstrated experience in barndominium builds. The contractor’s qualifications, including licenses, general liability, and worker’s compensation insurance, along with their financial stability, will be thoroughly vetted.

Appraisals for barndominiums can be challenging due to a limited number of comparable sales in many regions. Lenders frequently require an appraiser experienced with unique properties, and a detailed plan and cost breakdown from the borrower can assist in determining fair market value. The appraisal must confirm the property’s marketability and compliance with local standards and building codes. Furthermore, the property’s location and zoning are crucial; the land must be suitable for residential use, with verified access to essential utilities like water, sewer or septic systems, and electricity, as well as road access.

Local zoning ordinances must explicitly permit a barndominium as a primary residence, and proof of approved building permits is mandatory before any construction commences. To streamline the application process, borrowers should gather several documents in advance:

• Proof of income, such as pay stubs for the last 30-60 days and W-2s for the past two years, or two years of tax returns for self-employed individuals.
• Bank statements from the last two to three months to verify assets and reserves.
• Identification like a driver’s license and Social Security card.
• A property survey.
• Approved building permits.
• Detailed contractor bids and contracts.
• A comprehensive project budget.
• Quotes for builder’s risk insurance (during construction) and homeowner’s insurance (post-completion).

Navigating the Loan Application and Approval Process

After completing preparatory steps and gathering documentation, the next phase involves engaging with lenders. Seek lenders with specific experience in financing barndominiums or other unique property types, as they are more likely to understand the intricacies involved. Local credit unions and regional banks often demonstrate greater flexibility and understanding for non-traditional housing projects compared to larger national institutions. Initiating online searches for “barndominium lenders” or “non-traditional home loans” can provide a starting point for identifying suitable financial partners.

Once a prospective lender is identified, the formal loan application can be submitted, typically either online, via email, or in person. This application will require comprehensive personal financial information, detailed property specifics, and a thorough outline of the construction project. Ensuring all previously gathered documentation, such as income verification, detailed building plans, and contractor bids, is accurately organized and submitted is important for a smooth process. Any discrepancies or missing information can significantly delay the review.

Following submission, the application enters the underwriting phase, where the lender’s underwriting department reviews all submitted financial documents, property plans, and borrower eligibility criteria. This process involves a comprehensive assessment of the borrower’s creditworthiness, the stability of their income, and the overall feasibility and risk associated with the proposed construction project. Underwriters will verify employment history, scrutinize credit reports, and analyze the proposed construction budget to ensure it aligns with industry standards and the property’s projected value.

During the underwriting process, the lender will order an independent appraisal to establish the property’s value, which is an important step for barndominiums given their unique nature and potential lack of direct comparable sales. For construction loans, lenders typically conduct periodic inspections, known as draw inspections, before releasing funds for each phase of construction. These inspections are designed to confirm that work has been completed according to the approved plans and budget. A final inspection may also be required before the permanent loan conversion or the final disbursement of funds.

If the underwriting review is satisfactory, the loan will receive conditional approval, meaning the loan is approved pending the satisfaction of specific outstanding requirements. These conditions might include submitting updated financial statements, clarifying certain project details, or obtaining additional permits that were not initially available. Borrowers must promptly address and satisfy all outlined conditions to progress toward final loan approval. Upon meeting all conditions, the loan moves to the closing process, which involves signing legal documents, including the promissory note and the mortgage deed. For construction loans, funds are disbursed in stages, or “draws,” as construction progresses, rather than as a single lump sum at closing. Borrowers should also anticipate paying closing costs, which typically range from 2% to 5% of the total loan amount, covering various fees such as loan origination, appraisal costs, title insurance, and other administrative services.