How to Get a Loan to Build a Barndominium

A barndominium is a unique structure that blends the functional design of a barn or workshop with comfortable living spaces. These hybrid buildings, often featuring metal construction and open floor plans, offer a customizable alternative to traditional homes. While their popularity has grown, securing financing for a barndominium can differ significantly from obtaining a mortgage for a conventional stick-built house. This guide will navigate the process of obtaining a loan for your barndominium project.

Understanding Barndominium Financing Nuances

Lenders often consider barndominiums “non-traditional” properties, which introduces unique challenges for financing. This classification stems from their distinct construction methods, which frequently involve steel frames or other unconventional materials, differing from the wood-framed homes most lenders are accustomed to underwriting. The combination of residential and potential workshop or agricultural spaces can also make lenders hesitant.

A significant hurdle in financing barndominiums is the appraisal process. Appraisers rely on comparable sales (comps) to determine a property’s value, but with fewer barndominiums in the market, finding suitable comps can be difficult. This lack of comparable data can lead to uncertainty in assessing market value, making lenders more cautious about offering financing. The perceived risk of resale difficulty, should foreclosure become necessary, also makes some banks wary.

Lenders may view barndominiums as riskier investments due to their unique nature. This perception can result in higher interest rates and increased down payment requirements compared to traditional homes. Additionally, zoning regulations can pose challenges, as barndominiums may fall into a gray area between residential and agricultural or commercial classifications. Finding a lender familiar with barndominium projects is beneficial, as they often understand these unique aspects and may offer tailored loan options.

Common Loan Types for Barndominium Projects

Several financing options exist for barndominium construction, each with its own structure and suitability. Construction-to-permanent loans are often the most suitable option for these projects. This type of loan combines the construction financing and the permanent mortgage into a single product, requiring only one application and one closing process. During the construction phase, borrowers typically make interest-only payments on the funds drawn, and the loan automatically converts to a traditional mortgage upon completion. This single-closing approach can simplify the process, reduce paperwork, and offer protection from interest rate fluctuations during construction.

Conventional construction loans typically require two separate closings. One loan covers the construction phase, and a second permanent mortgage is secured to pay off the construction loan once the project is complete. This approach means two sets of applications and closing costs. Some lenders accept conventional loans for barndominium projects, often requiring a minimum credit score around 620 and a debt-to-income ratio of 43% or lower.

Government-backed loans, such as FHA, VA, and USDA loans, have specific conditions. FHA loans, designed for first-time buyers or those with lower credit scores, can cover land purchase, construction, and permits. They may offer a down payment as low as 3.5% for credit scores of 580 or higher. However, FHA loans have strict property requirements, necessitating that the barndominium be:

• A single-family residence.
• Meet habitability standards.
• Comply with local building codes.
• Built by a licensed contractor.

VA loans offer benefits to eligible veterans and their spouses, including competitive interest rates and no down payment requirements. The property must meet VA requirements and appraise sufficiently. USDA loans are available for properties in eligible rural areas, offering zero down payment for qualified borrowers and government-regulated interest rates. USDA construction loans are typically single-close mortgages, simplifying the process. However, USDA loans have income restrictions and specific property eligibility criteria, including requirements for the barndominium to:

• Be a primary residence.
• Meet all USDA property standards.
• Comply with local building codes.

Land loans can finance the purchase of land alongside construction. These loans often have higher interest rates and shorter repayment terms than traditional home mortgages. Personal loans or home equity lines of credit (HELOCs) are not suitable for full barndominium construction due to their loan limits and shorter repayment periods.

Loan Application Preparation

Preparation is important before applying for a barndominium loan. A strong financial standing is a primary consideration, encompassing a robust credit score, a manageable debt-to-income (DTI) ratio, and sufficient funds for a down payment. Lenders look for a credit score of 620 or higher for conventional construction loans, and a DTI ratio below 45% is preferred. While some programs offer lower down payment options, a substantial down payment, 15% to 20% or more, can improve loan terms and increase approval likelihood for unique properties.

Gathering personal financial documentation is important for the application process. Lenders require proof of income, including recent pay stubs, W-2 forms from the past two years, and federal tax returns. Statements for asset accounts, such as checking, savings, and investment accounts, are also necessary. A list of existing debt obligations, including credit card statements, auto loans, and student loan details, will be required.

Project-Specific Documentation

Project-specific documentation provides lenders with a clear understanding of the proposed barndominium. This includes:

• Detailed construction plans, blueprints, and architectural designs, including electrical, plumbing, HVAC, roof, foundation, door, and window specifics.
• A material list and budget breakdown.
• Signed contracts from approved builders or general contractors.
• Proof of progress toward obtaining necessary permits.
• Proof of land ownership, a recent survey, and clear title information for the construction site.

Lenders may also require the construction company or general contractor to undergo a vetting and approval process, ensuring their experience and financial stability.

The Construction Loan Process

After a barndominium loan application is submitted, it enters the underwriting phase. The lender reviews all provided documentation, including financial records, credit history, and detailed project plans. Once underwriting is complete and all conditions are met, the loan receives final approval.

The loan closing for a construction loan formalizes the agreement. During this phase, various documents are signed, and closing costs are paid. For construction-to-permanent loans, this is a single closing that transitions to the permanent mortgage after construction.

Construction funds are released in stages, known as draws, as construction progresses. A pre-agreed draw schedule outlines these payment milestones. Common draw stages include site preparation, foundation, framing, exterior enclosure, and interior finishes. Each draw request must include invoices, receipts, and proof of completed work.

Lender inspections are a routine part of the construction loan process, verifying that work is completed according to plans and meets specific milestones before funds are released. These inspections help protect the lender’s investment by ensuring the project is on track and built to standard. Once construction is complete and all inspections are passed, the construction loan converts into a long-term permanent mortgage. This conversion occurs after the barndominium receives its certificate of occupancy. The borrower oversees the project timeline, manages the budget, and maintains clear communication with the lender and builder.