A barndominiums, or “barndo”, as many people call them, is pretty much what it sounds like: a barn converted into living accommodation. However, you don’t have to bed down with the farm animals.
Instead, many people use the romantic, rustic-looking agricultural structure to make a modern, sleek, affordable residential space. And, if you have a hobby or business, you can often incorporate this into the barndo’s design.
What’s A Barndominium Home?
Choose from two types of barndo:
- New Build – A new structure designed as a home in the agricultural style.
- Converted Barn – A building previously used for agricultural purposes, such as housing animals, machinery, or feed, converted into a home.
These vague definitions could be open to many interpretations. So perhaps, we should define a barndo as any partial or wholly residential building with an exterior metal skin and an agricultural style.
FHA Barndominiums Loan Overview
A converted barn is an affordable way of buying a good-sized home, as usually the foundations and structure are already there, and abandoned barns sell for much less than houses.
However, what do you do when you’ve used up all the disused barns? The answer is to build one. Generally, using a kit. Typically, a conventional home costs around $150/sq. ft. to build, whereas a barndo can cost as little as $70-$100/sq. ft.
This amount might be out of an ordinary person’s reach. So, they approach a mortgage company. However, they’ll have problems finding a regular mortgage if they have a low credit score.
Instead, they choose a US government-backed Federal Housing Authority (FHA) loan, designed to encourage people to own their homes by guaranteeing their mortgage with a lender.
Read on and learn how ordinary people can own a home.
Understanding FHA Loans
Because the government backs FHA loans, you’ll find that banks will offer them to people with low credit scores or first-time buyers. However, you must satisfy the FHA that you’re a reasonable risk.
You must know what you want, how much it’ll cost, and have the required documents in place. Having this information ready for inspection shows the lender that you’re serious about the project, have a proper plan, and intend to finish the project within an appropriate timeline.
FHA loans are specifically designed for first-time buyers and those with credit scores as low as 500, provided you have 20% of the total cost ready as a downpayment. And you meet other financial criteria that we’ll discuss later.
Furthermore, FHA loans cover the purchase of land, construction labor and materials, and permits, so almost everything is covered. However, some FHA loans aren’t available for certain types of modular housing, so call a Housing and Urban Development (HUD) approved housing counselor for advice or ask an FHA lender for information on their loan products.
FHA Loan Requirements For Barndominiums
A barndominium isn’t a conventional residential property, so you might find problems securing a traditional loan to buy and build, especially if you’re not financially secure.
Furthermore, an FHA loan has borrowing limits, so ensure your construction plan doesn’t exceed these. However, its criteria are less stringent than conventional loans, so it’s generally easier to secure.
How To Get An FHA Construction Loan
The FHA construction-to-permanent loan is the ideal way to build a new barndo. To get one, follow these steps:
- Identify the building plot.
- Pre-approve by an FHA lender.
- Hire a licensed contractor with FHA construction loan experience.
- In some cases, hire an FHA-approved consultant to supervise the project.
- Close the loan.
- Start the project.
Eligibility Criteria
At the time of writing this article (August 2023), you need the following criteria to secure an FHA loan for your barndo:
- Have a minimum credit score of 500.
- You must have a debt-to-income ratio of less than 43%.
- Have a downpayment of more than 10%.
However, if the HUD approves the project and your credit score exceeds 580, the downpayment drops to 3.5%.
Specific Property Requirements
To secure finance for your barndo, the lender has specific requirements.
Property Classification
Barndominiums aren’t classified like conventional residences. Furthermore, they may already have an agricultural classification, limiting the types of finance available.
Therefore, use lenders who know about barndos and understand the specific loan requirements.
Location
Some lenders may prefer not to finance properties in rural areas, making it challenging to find a suitable lender.
Building Permits and Codes
All barndos must comply with local and state building codes and secure permits.
Unfortunately, you won’t secure finance if these aren’t in place before applying for an FHA loan.
Barndo Appraisal
FHA Lenders need your property appraised to determine the finished property’s value. Many factors are reviewed, such as:
- Condition of the land and existing property
- The plot’s size and location
- Value of improvements
- Value of the barndo’s industrial components
Downpayment
A lender always needs a downpayment, with a size depending on many factors such as:
- Credit score
- Dept to income ratio
- Total household income
Typically, you must provide a downpayment of more than 10%-20% of the total loan.
Credit Score
If you want a loan, you must have proof of the following:
- Your creditworthiness
- Ability to manage your financial responsibilities
- Provide an appropriate payback period
Lenders call this your credit score. If you have a good credit score, you’ll have more chance of securing favorable terms for your loan.
Finding A Lender For FHA Loans
Finding a suitable lender can be challenging because the barndominium trend is relatively new, and financial institutions are generally conservative and unlikely to take on unknown risks.
Therefore, try to choose a location that already has a few barndos. Lenders in this area will already know a barndo’s benefits, and it won’t be an unknown risk.
Furthermore, you can find out which loan companies operate in the area and are more likely to provide finance by talking to the existing barndo owners. Usually, there will be local banks, and farm credit unions, with interest rates and loan terms specific to their company.
Although local knowledge is indispensable, review government lists of approved FHA lenders. Also, seek advice from a HUD-approved housing counselor if you’re unsure. And, if you need help raising a downpayment, many state governments offer homebuying programs to help you achieve your goal.
Preparing Your Finances
Before taking out a home loan, get your financial affairs in order.
Pay Off Debts
Outstanding debts and loans reduce your chances of securing a mortgage mainly because your income will only support a finite amount of borrowing. For example, if you’re just about pay your living expenses and debts, you won’t afford an additional loan payment.
Therefore, pay off as many of your debts as possible, preferably large ones.
Credit Score
Although your lender has a copy of your credit report, you should get one too. Then, check for errors and issues that might count against you.
A lender needs documents proving credit discrepancies, so correct them and compile supporting documents to prove your case.
Downpayments
Lenders won’t offer finance without a downpayment. The actual amount depends on your credit score and loan size. Alternatively, provide collateral as security against your loan. For example, a house, land, or savings account.
Therefore, if you default on the loan, the lender has something of material value. The advantage of having collateral is that you can borrow more, and even those with a bad credit score or low income can qualify for a loan.
Closing Costs
Closing costs are fees charged by the lender, attorneys, and other companies involved in the loan process. Generally, these vary among lenders but are between 2%-6% of the property’s value.
Ensure these are affordable before signing the agreement.
Pre-Approval Process
Pre-approval is the stage before gaining approval from your mortgage lender. After submitting various supporting documents, you’ll receive conditional approval allowing the barndo purchase to proceed, while the lender finalizes the loan’s details.
Generally, the lender will issue the loan subject to their conditions. Typically, these are:
- Proof of a savings account holding enough money to pay the downpayment
- A signed letter from someone intending to gift money to help with the purchase
- Detailed financial records, including bank statements, proof of income, details of other debt loans, tax records, etc.
- Homeowners’ mortgage insurance documents
- FHA home appraisal report
- Employer’s confirmation that you are employed
You will receive a conditional approval letter when you have satisfied the conditions.
Finding The Right Barndominium Property
An FHA-approved barndo is eligible for purchase via the FHA loan process. Generally, they’re for first-time homeowners, those who haven’t owned a property within the previous three years, or those with a bad credit score.
An FHA loan has limits of $472,030 or up to $1,089,300 in a high-cost region. Therefore, the total borrowing must be less than this to qualify for an FHA loan.
To ensure your future home satisfies the FHA assessors, we advise you have an independent inspection beforehand. This isn’t strictly necessary, but it allows you to identify issues and renegotiate the barndo’s price before the loan assessor’s appraisal.
Sometimes, problems might make the barndo ineligible for an FHA loan.
The FHA Loan Application Process
An FHA construction-to-permanent loan arranges the construction loan and mortgage simultaneously. Therefore, there’s only one loan closure.
The loan begins as a short-term loan during construction. After that, it converts to a mortgage for the remainder of the 15 or 30-year term.
Complete the Application
Before applying for an FHA loan, prepare all documentation to streamline the process.
Licensed Contractor
Before starting the project, select a licensed contractor who previously worked with your lender, thus reducing the lender’s risk by ensuring a vetted professional does the work.
Construction Plan
Having a good plan and timeline is essential, so the lender can see that you’re serious and know when funding deadlines appear in the timeline.
Approval Process
Assemble and compile copies of the construction plan and all your financial documentation, including:
- Pay stubs to prove you’ve been in stable employment for more than two years
- Suitable identification to prove loan eligibility
- Proof your credit score is above 500
- Details of regular debts and income
- Bank statements
Homeowner’s Insurance
After securing the loan, you need homeowners insurance to protect everyone working on the project while on the construction site.
FHA Appraisal and Inspection
Hire a certified home inspector to inspect the property. Their report shows all problems to be fixed before the FHA appraisal. It may provide help when renegotiating the purchase price.
Home Inspection
Typically, an independent certified home inspector will review the following:
- Heating and HVAC systems
- Interior electrical and plumbing systems
- Rainwater management systems
- Loft or attic and insulation
- Walls, ceilings, and floors
- Doors and windows
- Foundations
- Structural components
- Basement, if present
The home inspection takes 2-4 hours or more. Usually, the report arrives in a couple of days and highlights water damage, termites, lead, asbestos, radon, or mold.
Typically, the inspection costs $300-$450.
Appraiser Visit
Before securing an FHA loan, the project must be appraised. Typically, the appraisal process completes within a week:
An FHA-approved licensed appraiser will visit at a mutually convenient time. Typically, they’ll inspect the condition of the following:
- The property’s surroundings
- Interior condition
- Exterior condition
Appraiser’s Opinion and Report
The appraiser collects data, photos, and descriptions of the property, describing its condition and current market value. From this data, they compile a formal report.
Appraiser’s Recommendations
Suppose the appraisal highlights issues that don’t comply with the FHA loan acceptance criteria.
In that case, they’ll list the repairs and changes necessary to comply with the approximate price.
Underwriting and Loan Approval
Once you’ve submitted the documentation to the lender, the underwriter reviews your FHA loan application, which can take up to 45 days.
The underwriter’s job is to confirm that your circumstances meet the minimum FHA financing guidelines.
For example:
- Current debts and income to calculate the debt-to-income ratio
- Bank statements, assets, and promissory letters confirming you have funds for downpayment and closing costs
- Two years of tax returns and W-2 statements to verify stable employment
- Recent pay stubs to prove employment and income
- An appraisal for the property’s current market value
Closing The Loan
You have already received a preliminary closing cost when you applied for the loan. Now, you’ll receive a closing disclosure with a final figure and breakdown of all closing costs.
Typically, for a $300,000 loan, expect to pay $8,000-$18,000. Closing costs vary with the loan’s size and your home’s location, as they’re more in states with higher tax rates.
Review the closing disclosure for errors as it provides the final loan details, such as:
- Loan terms
- Monthly payments
- Fees and charges to secure the loan
Confirm the closing costs don’t vary significantly from the estimated costs. Some costs can increase by up to 10%, while others will never change. This website shows some helpful information.
Review the loan terms and closing disclosures and ask any questions. Understand when you pay your first installment and the method of payment.
After signing the loan closing documents, you’ve agreed to the terms and can’t go back on it.
Post-Closing Considerations
An FHA loan requires you to pay an upfront mortgage insurance premium (MIP), which in 2022 was 1.75% of the base loan. Furthermore, there’s also an annual MIP, which you pay monthly, ranging from 0.45%-1.05% of the base loan.
To satisfy the FHA loan terms, you must comply with the requirements specified in the closing disclosure. This includes:
- Maintaining your credit score.
- Continuing with the mortgage insurance payments.
- Keeping the loan repayments.
- Staying within budget and timeline as specified in the construction plan.
Discuss your situation with your lender if there’s difficulty complying with the FHA requirements.
4 Alternatives To FHA Loans For Barndominium Financing
There are government agencies other than the FHA that back lenders’ funding, such as USDA and VA. Therefore, check out which is the best route for your circumstances. If you’re a veteran or want to build a rural farm, these might be better.
Not everyone is eligible for an FHA loan for a barndo purchase, and not every barndo complies with the FHA requirements. For example, it might be predominantly a commercial building. If this sounds like you, then consider other home loan routes.
1. Conventional Construction Loan
Finding a mortgage lender to finance your barndo build is possible. However, find one that knows what barndos are and the pros and cons.
Barndos are relatively new, and financial institutions are inherently conservative and might not recognize your property as a good risk. If so, try another lender.
Typically, you’ll need at least a 20% downpayment, depending on your credit score.
2. USDA Loan
The US Department of Agriculture (USDA) provides financial support to stimulate the creation and growth of rural businesses.
Therefore, if your barndo is rural, you might qualify for a USDA loan. Each eligible state has relevant programs to encourage construction-to-permanent loans for those with low incomes.
Each loan’s requirements vary depending on the state. So, browse your state’s website and contact the local USDA Rural Development Office for more information.
3. VA Loan
The Department of Veterans Affairs helps service veterans with home financing.
A VA loan doesn’t usually require a downpayment and offers lower interest rates than other providers.
4. Other Construction Loans
Fanny Mae and Freddie Mac offer various construction and renovation products.
However, it’s unclear as to whether they cover barndominiums. Check with their local office for more details.
Summary
To recap, the steps needed for a barndo FHA loan are:
- Select land and property that complies with FHA requirements.
- Maintain a credit score of above 500.
- Pay a downpayment of 3.5%-10% depending on credit score.
- Maintain mortgage insurance.
- Use a licensed FHA-approved builder.
- Comply with the loan terms and conditions.
If you want to buy and build barndominiums, explore the opportunities of an FHA loan. It helps ordinary people own their homes. By using federal programs like FHA and including other state and local funding programs, you can make owning a “forever” home for you and your family a reality.
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