How Do You Finance a Barndominium?

A barndominium integrates the rustic, open design of a barn with the comforts of a modern home. These structures appeal to individuals seeking unique living spaces, cost-effectiveness, and design flexibility. Financing these specialized properties differs from traditional home loans, requiring a clear understanding of the specific options and processes. Lenders approach barndominium financing with distinct considerations due to their unique nature.

Understanding Barndominium Financing Options

Financing a barndominium project involves distinct loan types, each suited for different stages of development. Construction loans are a common choice for custom builds, providing funds for land acquisition, material purchases, and labor costs. These loans are short-term, with funds disbursed in stages, known as draws, as construction milestones are met.

A construction-to-permanent loan, also called a single-close loan, combines construction financing and the long-term mortgage. This means borrowers undergo one application and closing process, which can save on closing costs and simplify the transition to permanent occupancy. Once construction is complete, the loan automatically converts into a traditional mortgage, typically with a 15- or 30-year term.

For barndominiums that are already completed and meet local residential standards, a conventional mortgage may be available. These loans often require a down payment, commonly 15% to 20% of the property’s value. A conventional mortgage relies on the property appraising as a residence and meeting specific local building codes. Some lenders now offer conventional financing for barndominium builds similar to traditional homes.

Government-backed loans, such as FHA, VA, and USDA, can also be used for barndominiums. FHA loans, which are government-insured, may offer lower down payment requirements but come with stricter guidelines and often require mortgage insurance. VA loans are available to eligible veterans and their spouses, providing competitive interest rates and potentially no down payment. USDA loans cater to properties in designated rural areas, offering favorable terms and sometimes zero down payment options. These government programs often feature single-close construction-to-permanent options, simplifying the financing process for eligible borrowers.

Lender Considerations and Eligibility

When evaluating barndominium financing applications, lenders assess the borrower’s financial standing and the property’s specifics. Borrower qualifications include a strong credit score, a low debt-to-income (DTI) ratio, and a stable income with consistent employment history, often requiring a two-year history.

Down payment requirements vary, but construction loans often necessitate a larger upfront investment, sometimes 15% to 20% of the total project cost. Land equity can count towards the down payment. Lenders seek evidence of financial stability to cover potential contingencies during construction.

Property-specific considerations are important due to barndominiums’ unique nature. Lenders require detailed architectural plans and blueprints outlining the structure’s design, materials, and specifications. These plans must demonstrate feasibility and compliance with building standards. The contractor’s qualifications are scrutinized; lenders prefer licensed and insured professionals with a verifiable track record in similar construction projects. If the borrower plans to act as an owner-builder, specific experience or professional oversight might be required.

Appraisal challenges can arise because comparable sales data for barndominiums may be limited, making it difficult to establish a value. Lenders need assurance that the completed barndominium will appraise for at least the loan amount. The property must meet all local zoning, building, and safety codes to be financeable. Lenders require proof of permits and approvals before funding construction draws.

Gathering Your Financing Application Materials

Before applying for barndominium financing, prospective borrowers need to compile a comprehensive set of documents. These documents demonstrate financial readiness and project viability.

Personal Financial Documents

Proof of income: Recent pay stubs, W-2 forms from the past two years, and federal tax returns for the most recent two to three years. Self-employed individuals also need profit and loss statements, along with personal and business tax returns.
Bank statements: For the past two to three months to verify assets for the down payment and reserve funds.
Identification documents: Such as a driver’s license and Social Security card.
A comprehensive list of all outstanding debts and existing assets will be required to assess your overall financial picture.

Property and Project Documents

Barndominium plans or blueprints.
A detailed cost estimate or budget, itemizing all anticipated expenses for materials, labor, permits, and a contingency fund.
Deed or proof of land ownership, if the land is already owned.
The builder’s contract and credentials: Including their license, proof of insurance, references, and a portfolio of similar projects.
Evidence of necessary permits and approvals: Such as zoning approvals, building permits, and any specific permits for septic systems or wells.
Proof of insurance: Including builder’s risk insurance during construction and a plan for homeowner’s insurance upon completion.

The Barndominium Financing Process

The barndominium financing process begins with initial assessments. Pre-qualification or pre-approval provides an estimate of the amount one might be able to borrow. Pre-qualification is a preliminary, less formal assessment based on self-reported financial information, while pre-approval involves a more thorough review of documentation and a credit check. Obtaining a pre-approval letter can demonstrate seriousness to builders and land sellers.

Next, the formal loan application is submitted, providing the complete package of gathered financial and project documents to the chosen lender. The application then moves into the underwriting phase. Underwriting is the lender’s internal process of verifying all submitted information—including credit history, income, assets, and property details—to assess the risk of lending.

During underwriting, the lender orders an appraisal of the property. For barndominiums, this involves evaluating the proposed structure based on plans and comparable properties. The lender may also require various inspections to ensure the property’s value and structural integrity. If all conditions are met, the loan reaches approval, and the lender issues a commitment letter outlining the terms and conditions of the financing.

The final step is loan closing, where all necessary documents are signed, and funds are disbursed. This involves reviewing the closing disclosure, which details the final loan terms, monthly payments, and closing costs. For construction loans, funds are released through a series of construction draws, tied to specific milestones and released after inspections confirm the completion of each stage.