Suppose you want an affordable home out of the city among the wide open spaces. In that case, a barndominium or “barndo” is the ideal choice.
Typically, a barndo is a single-family modular home with a permanent foundation and a large open-plan first floor, thus, allowing room for hobbies, a small business, or open-plan living space.
Because of its design, a barndo is self-supporting with all the structural strength in the outside walls. Therefore, you can place non-structural partition walls anywhere within the shell and have more living or bedroom space on the second floor.
Although a barndo is more affordable than a conventional house, it’s still financially out of the reach of many purchasers. Therefore, financing is an essential step in its purchase, and you should look at all the options open to you.
Types of Barndominium Financing Options
Cash Purchase
Some lucky people don’t need to worry about borrowing money for a barndo build and can purchase their property with cash. The advantages and disadvantages are as follows:
Pros
- You own your property outright.
- You aren’t dependent on a lender to decide whether you are a good risk.
- Your credit score doesn’t matter at all.
- You aren’t at the mercy of increasing interest rates as the national economy changes.
- As long as you follow the local building codes and zoning regulations, you can do precisely what you want with your property.
Cons
- You have all your money tied up in the property, which for some people, means that you may not have enough savings for other purposes.
Traditional Mortgage Loans
A traditional mortgage loan isn’t part of a federal or state government program, so you enter into an agreement with a lender based on your own merits. Typically, conventional mortgage loans are cheaper and have better interest rates than most other loan types.
Generally, you need an excellent credit report and a downpayment to qualify. But, if you have a poor credit score, expect high-interest rates and a large downpayment.
Typically, you can borrow up to around $650,000 using a conventional mortgage. However, if you’re building in a designated high-cost area, the limit is about $980,000. But, higher loans are available by taking out a Jumbo loan.
Pros
- These often have cheaper interest rates than other loans.
- You might qualify for an adjustable rate or interest-only mortgage if your credit is good.
Cons
- You need an excellent credit score to get the best interest rates.
- The downpayment depends on your credit score. A poor score means you have a large downpayment.
- You don’t have the fringe benefits of a federal or state-backed mortgage.
Construction Loans
A construction loan is a short-term loan with a higher interest rate than a standard home loan. It allows you to buy land, purchase materials, and hire a contractor to build your barndo.
The funds are released at agreed intervals to pay for the construction, and you only pay interest on what you’ve used. When you finish the construction phase, the loan converts to a standard long-term loan with typical mortgage interest rates.
There are two types of construction loans available:
Construction Only
This loan is exactly as it sounds. It’s for the construction of the property only. When the building phase is complete, you must look for a standard mortgage to refinance the construction loan.
Unfortunately, there will be two applications, separate loans and closings. But you have the flexibility to shop around for the best mortgage deal at the time.
Pros
- There’s more flexibility in finding the best mortgage available to cover the loan.
- The mortgage rates may have decreased during the construction phase.
Cons
- This loan only finances the construction phase.
- Mortgage rates may have increased during the construction phase.
- There are two separate loans to negotiate, including two closing fees.
Construction-to-Permanent
This loan is generally preferred by borrowers as there’s only one loan to negotiate and one set of closing fees. The lender approves the builder, construction plans, and estimate before work starts.
Typically, the borrower only pays interest on the money drawn by the builder at specific stages in the timeline. Usually, this is every 1-3 months.
Then, when the construction phase is complete, and you’ve drawn all the construction money, the loan converts to a regular mortgage.
Pros
- There’s only one loan to negotiate.
- Only one closing fee.
- You have the same lender all the way through.
Cons
- You’re tied into the agreement and can’t find another lender with better terms to provide the regular mortgage.
FHA Loans
The FHA loan is a financing option offered by banks and private lenders and backed by the Federal Housing Administration. It provides home financing help for those with a low to moderate income, particularly first-time buyers.
You can use the loan for all expenses associated with a house purchase, as it covers land, materials, labor, and building permits. Moreover, an FHA loan requires a minimum downpayment of 3.5%, making it very attractive for those who can’t afford much outlay.
However, the debt-to-income ratio is stringent, but if you have equity or savings, there is room for negotiation.
Pros
- Low downpayment of at least 3.5%.
- No income limit, so high-income earners with a poor credit score can still qualify.
- Available for low credit score applicants. Typically, you need a minimum score of 580. However, if your score is between 500 and 579, you can still qualify with a larger downpayment.
- Available for multiple housing options, including barndominiums.
- Take out low Private Mortgage Insurance (PMI), even with a low credit score.
Cons
- As of 2023, you can buy a single-family home with a limit of $472,030 or $1,089,300 in high housing-cost areas.
- You must pay a one-off upfront insurance of 1.75% of the loan and an annual mortgage insurance premium, added to your monthly mortgage payments.
- The FHA loan is for a primary residence only. Investments or vacation properties need a different loan.
- The property you buy must meet strict safety standards, which is often a problem if you’re buying a fixer-upper. Before qualification, the property must have an inspection to determine if it meets the criteria. And, if there are issues, they must be fixed before loan approval.
VA Loans
Suppose you’re a veteran or still in the military. In that case, the Department of Veteran Affairs has home loans designed specifically for you to purchase a primary home or refinance an existing mortgage loan.
The VA appraises your property to ensure it meets its minimum property requirements. Once the underwriters have approved everything, you can close the loan.
There are specific eligibility criteria that you must have to qualify for a VA loan. But once you’ve got the VA Home Loan Certificate of Eligibility, you can purchase the property.
Pros
- VA loans need no mortgage insurance.
- You don’t need a downpayment.
- The interest rates are lower than with a conventional loan.
- There is no minimum credit score requirement.
- VA loans allow a higher debt-to-income ratio, helping qualify for larger or more expensive homes.
- The VA limits the amount a lender can charge for closing costs to 1% of the loan.
Cons
- There are restrictions on the property type you can buy.
- There’s more scrutiny on manufactured homes, and they need a structural engineering survey.
- Properties must be owner-occupied.
- The property must be a primary residence.
- You must have a home inspection and appraisal before buying. Therefore, many sellers won’t accept an offer from a veteran.
- You must pay a funding fee on closing. Typically, the cost is 2.15% of the loan amount. However, if you have service-connected disabilities or are a surviving spouse, you may be exempt from this fee.
USDA Loans
The US Department of Agriculture (USDA) has government-backed home loans from many private lenders and banks. However, these loans are only available in designated rural areas.
The mortgage needs no downpayment and is for low-income homebuyers. Furthermore, it has a simplified application process.
Suppose you want to build instead of simply buying. In that case, it provides a construction-to-permanent loan combining a construction loan and a mortgage into one package with one closing fee. Typically, the interest rate is around 3.75%.
The requirements of the property include:
- The property must have an all-season access road.
- It must be structurally sound.
- It must have a suitable roof.
- The property must have suitable plumbing and drainage systems in place.
- It must have a fully operational HVAC system.
- It must have a safe and functional electrical system.
Pros
- No limit for guaranteed loans.
- No downpayment.
- The seller can pay the closing fees.
- You can purchase a property or refinance an existing loan.
- Direct loans have low and fixed interest rates.
Cons
- The home must be a primary residence.
- It must be within a designated area.
- You must have an income within specified limits.
- There are annual and upfront fees.
- The property must not be a commercial investment. But, you can buy structures previously used as commercial property.
- When building a new barndo, you must hire a USDA-approved contractor.
Home Equity Loans
Suppose you have equity left in your existing home loan. In that case, you can use this as collateral for a loan to build a barndominium.
Pros
- The loan has a fixed interest rate, often lower than other loan types.
- Simple regular monthly payment.
- Loans can be up to 30 years.
- Use the loan for almost any purpose.
- Interest payments might attract tax advantages.
Cons
- You must have enough equity in your existing home and maintain more than 15% equity after borrowing the loan.
- You pay closing costs of 2%-5% of the loan amount.
- If you already have a mortgage, you will have two mortgage loans reducing your disposable income.
- A suitable debt-to-income ratio.
- Have a good credit score of at least 660.
- A good credit history.
- Need proof of regular employment.
Personal Loans
Personal loans allow you to borrow cash for any purpose. You repay the loan over a specified duration at a set interest rate.
Generally, borrowing is limited to $100,000 over 12 years, depending on your financial and credit circumstances. Personal loans aren’t secured, so you pay higher interest rates than a secured loan.
Typically, a personal loan attracts an interest rate of 9% for borrowers with a credit score above 760.
Pros
The advantages are as follows:
- You receive a lump sum at a fixed monthly rate, making the repayments easier to manage, unlike payday loans and other short-term loans.
- Personal loans have a fast approval time. Therefore, they’re helpful in emergencies where you need to quickly find a pile of cash, often the next working day.
- A personal loan isn’t secured on your home, car, or other assets. Therefore, you don’t worry about losing your home if you can’t keep up the payments.
- Personal loans have lower interest rates than credit cards. At the time of writing (August 2023), the average interest rate for a personal loan was 11.29%, while average credit card interest rates were 20.6%.
- You can apply for a higher loan amount than from a credit card.
- You can use a personal loan for any purpose. However, check with the lender for limitations on use before taking out the loan.
Cons
- The loan is unsecured; therefore, if you can’t make the payments, you will have credit consequences, reducing your credit score.
- If you fail to repay the loan, a court can allow the lender to take your assets.
- If you have a low credit score, the lender usually charges high-interest rates.
- Personal loans have strict eligibility requirements. Therefore, if you have a poor credit history and a low score, you may have problems.
- Fees and prepayment penalties, if you pay the loan off before the end of the loan term, can significantly increase the overall borrowing cost.
- A personal loan is another regular monthly payment along with mortgage and credit card payments. Therefore, you may find it harder to budget and keep to the regular payments.
- Personal loans have higher fixed monthly payments over a fixed loan term. Therefore, it’s often more difficult to manage than credit cards with a low minimum monthly repayment and a no-deadline payment term.
Barndominium-Specific Lenders
Generally, barndos are categorized as factory-made modular homes and assembled on-site. Therefore, choose lenders who offer to finance modular homes, specifically barndominiums.
The following banks offer suitable products for barndos. However, there are many more, so do your research and find one that suits you. The list is ranked in alphabetical order only.
Chase Bank (JP Morgan Chase & Co.)
Chase Bank, also known as JP Morgan Chase & Co., is one of the largest mortgage providers in America. Unfortunately, their products also need some of the highest requirements.
Typically, a credit score of at least 700 with a 20% downpayment. However, the company also offers reasonable interest rates for the successful applicant.
Furthermore, they offer modular home loans with a line of credit, allowing you to pay the contractor and materials in stages. At the end of the construction period, you consolidate the construction loan into a conventional mortgage and start paying interest.
Fairway Independent Mortgage
Fairway Independent Mortgage is one of the largest lenders in the US. It provides many products suitable for barndos, especially barndo kits. However, there are no construction loans and few products suitable for land purchase.
Credit scores above 580 and downpayments start at 0%.
FMC Lending
FMC Lending offers products suitable for barndominiums, and it doesn’t matter what your credit score is. However, if your score is low, you must have downpayments, and your interest rates will be higher.
Typically, downpayments range from 20%-25%, with interest rates from 7.99% to 10.99%. It won’t be so bad if this is just for the one-year construction phase. But, if spread over 15 to 20 years, it can be very pricey.
Flagstar
The Flagstar Bank has many loans for modular homes, including some packages where you can purchase the barndo kit and assemble it yourself. You can also buy the land. This company offers barndo financing in every state.
You must have a credit score of at least 620; downpayments start from 3%.
Go Mortgage Corporation
Go Mortgage Corporation offers a way to purchase your real estate and barndo.
Different products are available depending on your circumstances and preferences, so you can choose which suits you. And you don’t pay any interest on your loan until the one-year build period finishes, and you’ve moved in.
Minimum credit score 640, and downpayments start at 3.5%
Nationwide Home Loans
Nationwide Home Loans Inc. is a top-rated lender for new build barndos. However, they only lend over $250,000. So, it might not be suitable for those who want to buy a barndo kit and self-build.
However, they offer flexible construction loans over a 12-month build duration, and you don’t start paying interest on the loan until you’ve moved in.
You can borrow to purchase a modular home and existing property. But you need a credit score of more than 620. However, some products don’t require a downpayment.
Also see: Banks That Finance Barndominiums
Barndominium Financing Requirements
You must satisfy the lender’s requirements if you want a home loan offer. Generally, if you use one of the federal government-backed programs, you will have better terms than going alone.
Here is a list of the most critical requirements.
Credit Score
Your creditworthiness is how the lender finds out what financial risk you are. Your credit score and credit history help determine whether you’ll repay your loan and stick to the agreement.
People with a good credit score of at least 650 are likelier to get a loan with lower interest rates.
If you apply for a conventional home loan, you must score more than 620. Moreover, the higher the score, the easier it will be.
If you use one of the government-backed programs, such as the FHA, you only need a score of 500-579 for a loan with a downpayment of 10%. Alternatively, a score of 580 and above reduces the downpayment to 3.5%.
Debt-to-Income Ratio
Another requirement is to have a good debt-to-income ratio. By comparing your debts with your income, the lender determines how easily you can repay the monthly payments.
Therefore, you must prove that your income is enough to pay your living expenses and the extra debt.
Credit Report
Three credit bureaus, Equifax, Experian, and TransUnion, detail your history of debt obligations and how well you paid them back.
Lenders use these reports to determine if you can repay your debts on time.
Income and Employment History
You must have proof of income and employment. The lender must know you have a steady cash flow to meet your monthly debts.
Furthermore, the lender must have proof that you are who you say you are, so proof of a regular monthly paycheck or tax return shows that you are entitled to work legally in the country and won’t use the loan for money laundering.
Collateral
Some types of loans, such as home equity loans, require a downpayment in the form of collateral. Usually, this is in the form of assets such as property, car, or savings account.
This type is a secured loan, and interest rates will be lower than for a non-secured loan as the lender isn’t as likely to lose their money.
Downpayment
Most lenders ask the borrower to provide a downpayment when they take out a loan. Requesting a downpayment ensures the borrower is serious about the loan and reduces the amount borrowed, as you’ve already paid a lump sum.
If you intend to buy a house and require a home loan, the downpayment goes into an escrow account managed by a real estate attorney. The account holds the funds and pays them to the seller on finalization of the deal.
Property Appraisal
Before a lender can decide how much to lend, they must know how much your property is worth. This amount depends on the recent sales in the same area.
An appraiser inspects the location, comparable house prices, and property condition and provides an appraiser’s report based on this data.
This is where a barndo purchase becomes tricky. Barndominiums are still relatively rare, and your area might not have enough modular homes of this type for the appraiser to make an educated guess on their value.
Construction Plans and Budget
A home loan lender needs to know that you’ve given some thought to your new-build barndo project and have a realistic timeline and estimated budget. The lender then has more idea of how much you need to borrow and for how long.
A good presentation is essential as you must appear professional. Therefore, hire a professional architect or a lender-approved contractor who will give your project an air of respectability.
Furthermore, using a contractor who has previously worked with the lender ensures the bank knows you’ll have a professionally built barndo.
Choosing the Right Barndominium Financing Option
Choosing the right barndo financing option from the right lender is essential to get value for money.
The following list gives some factors to consider when choosing a lender.
Customer service
You must know what happens at every stage of the borrowing process.
Therefore, choose a lender who is communicative and willing to answer your questions without all the jargon.
Interest rates and terms
Compare the interest rates, downpayments, and loan terms from multiple lenders.
From this information, choose the best loan that suits your purposes.
What fees are you responsible for?
We already know other costs and fees are associated with a home loan besides the mortgage repayments.
So, let’s keep a wary eye out for the following:
Origination fees
These fees cover the administration costs of your loan.
Commissions
Third parties, such as mortgage brokers, earn a commission.
Sometimes, the lender pays this. But, usually, it’s paid for by the borrower as a separate charge or included in the repayments.
Credit report fee
The lender needs a credit report from one of the credit bureaus. This fee covers the costs associated with this.
Once again, this can be a separate charge or included in the monthly repayments.
Discount points
The borrower can pay a one-off fee to reduce their interest rate.
Experience
Choosing a lender who knows nothing about modular homes in general or barndos in particular is not a good idea. If you do, you’ll end up paying over the odds for a product that isn’t what you want.
Lenders who don’t know about barndos will cover themselves and offer unreasonable terms and rates to be safe.
Reputation
Don’t go blind into this financial arrangement. You need to know what type of reputation the lender has.
Therefore, read customer reviews to ensure they understand their customers’ requirements and have an excellent customer satisfaction record.
Choosing a financing option: Its pros and cons
When choosing a financing option to buy your barndo, such as a mortgage, you must consider the following:
Adjustable rate vs. fixed rate home loans
The difference is simple. A fixed-rate loan has a fixed interest rate, whereas a variable-rate loan has variable rates.
Choosing a variable-rate mortgage is better if you can afford a short-term mortgage. Furthermore, if the interest rate drops consistently, selecting a variable rate is better; if the rate increases, you should choose a fixed rate.
Loan length
A construction loan is usually 12 months; you can do nothing about that as it’s a fixed short-term loan. However, a home loan can be either 15 or 30 years.
Choose a 15-year loan and pay a higher monthly payment if you can afford it. But, you pay off the loan faster and build your equity more quickly.
Alternatively, using a 30-year loan has significantly lower monthly payments, making it more suitable for those with lower salaries. However, paying interest over 30 years means you pay more in interest and a higher total sum.
Loan type
Banks and other lenders offer many mortgage products. However, the following home loans are the most common.
- A commercial bank offers traditional mortgages in line with the prevalent market conditions.
- Jumbo loans are for loans above $510,400. If this is for you, speak to private investors.
- The federal government backs some home loans to encourage low-income families to own their homes. The FHA, VA, and USDA back loans provided by existing lenders. If you meet the criteria of these home loans, they are worth selecting as they are more affordable, you don’t need a high credit score, and some loans don’t need downpayments.
- No-document loans don’t need the usual credit score and proof of income documents. However, the interest rates and downpayments can be out of the reach of ordinary people. Furthermore, there aren’t many lenders who offer these.
Downpayment
Although offering a downpayment might be difficult for some people, it’s better to lay down as much as you can afford.
Then, you end up borrowing less and paying lower interest rates.
Prepayment penalties
Lenders charge a prepayment penalty if you can pay off your home loan early. The penalty encourages the borrower to repay the principal over a longer period, thus allowing the lender to collect as much interest as possible.
Usually, the penalty is equivalent to the interest you’ve avoided paying. So, there’s rarely an incentive to repay a loan early.
Tips for a Successful Barndominium Financing Application
If you want your barndo home loan to be successful, ensure you follow the list below to improve your chances.
Getting things right can reduce application time and improve your chances of getting your application approved.
Find the right lender
Financing a barndo build differs from getting a conventional house mortgage.
Choose a lender who specializes in agricultural or modular buildings and knows what a barndominium is.
Make a solid plan
The lender wants to know that their money is in good hands and prefers to read a concise and straightforward report outlining what you want the money for.
A good plan includes as much detail as possible about what you want to build, approximate construction costs, timeline, and the contractor you intend to use.
Include photos and charts and make it look like you know what you’re doing. Present this information in a professional-looking report, and you’re halfway to achieving your goals.
Property appraisal
Get a licensed property appraiser to determine the value of your land and finished project.
If you haven’t many barndos in your area, the appraiser might have problems determining how much your finished property is worth. However, don’t give up.
Do you qualify for a mortgage?
Before looking for barndo kits, real estate, and lenders, you need to know how much money you can afford to borrow.
Your bank or credit union will run checks on your income and credit history, and you’ll know approximately how much you can afford to pay back.
Federal home loan programs
If you intend to select one of the government-backed home loan programs, check that you meet their eligibility criteria.
If you aren’t eligible, you won’t get on the program, no matter how much money you’ve got.
Improve your credit score
Pay off your existing debts, especially the large ones.
Thus, you’ll increase your residual income and the chance of getting loan approval.
Increase your income and savings
If you can, increase your income by getting a part-time job, moving to a different area, or finding better-paid employment. Another way is to take your existing savings and use a high-interest savings account to increase their value.
At the same time, try to decrease your outgoings. Perhaps, choose different vacation destinations and cut back on the luxuries.
Choose a lender that specializes in barndominium financing
Many lenders specialize in modular buildings or barndominiums, especially in rural areas.
Contact the USDA, and other government home loan programs, who have a list of approved lenders, or use some of the lenders mentioned in this article. Then contact as many as you can and enquire if they finance barndominiums.
Prepare all required documents
Get a copy of your credit report and check for errors and omissions. You’d be surprised how many have incorrect data.
So, get them sorted out immediately. The lender will already have a copy of your credit report but will need supporting documents to disprove any existing errors.
Compile all the documents supporting your application so it’s easy for them to read. If you make life easy for the lender, they will often make life easy for you.
Work with an experienced barndominium builder
Compile a resume of your preferred builder together with suitable references. Include a copy of their license and insurance bond, and ensure they are authorized to work in your state.
Using a builder already preferred by the lender or who has previously worked on a government home loan program will reassure the lender.
Frequently Asked Questions
Many people ask the following:
What is the average cost of building a barndominium?
According to HomeAdvisor, in 2022, a barndo cost from $120,000 to $540,000, with the average cost to build a 2,400 sq. ft. one being around $300,000.
How much down payment do I need for barndominium financing?
The down payment for a barndominium home loan depends on the type of loan, the lender, where you’re building, and whether a federal program backs the loan.
Generally, most lenders require around 20% of the loan amount as a downpayment. However, the VA home loan program requires no downpayment at all.
Can I use a barndominium as a rental property?
Yes, in theory, you can rent out a barndo.
But, in practice, this depends on the financing criteria and the mortgage terms.
How long does it take to get approved for barndominium financing?
If all documents are in place and there aren’t any holdups, you can expect the underwriter to approve your mortgage application within 45 days.
Can I get a barndominium loan with bad credit?
Several mortgage companies offer home loans to people with poor credit scores. However, expect to pay high interest rates, and lay down a substantial downpayment.
Alternatively, if you’re eligible for one of the federal government home loan programs, you can get a mortgage with a credit score of 500, and there are even some requiring no downpayment.
Next Steps
To be approved for a barndominium home loan, you must have the following:
- A good credit score and credit history.
- A suitable income-to-debt ratio.
- Enough funds to cover the downpayment and closing fees.
- Proof of a regular income.
Alternatively, use one of the federal home loan programs, backed by the VA, USDA, or FHA, where the loan terms are more favorable.
Some homeowners believe that barndominium financing is complex. But, it’s no different from getting a conventional mortgage. Take time researching the requirements of various lenders offering barndo finance options, and you should have no problems submitting your application. What are you waiting for?
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