Shouse Financing: Everything You Need To Know (2024)

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Are you among those who want to take a step and combine your living accommodation with their workplace? Being close to your place of work means you avoid the stressful daily commute and have more time to spend with your family.

Furthermore, if you have the money readily available, you can build a shouse quickly and affordably by choosing a steel prefabricated kit.

Unfortunately, few people have accessible funds to pay for a home up-front, so they must approach a lender for funding. Sounds scary, doesn’t it?

But, did you know that financing a shouse project is much easier than most people think? 

The rise in popularity of domestic shouses with a workshop attached should have pressured many home-loan lenders to develop products specifically for shop houses.

But finance companies are usually a conservative bunch, and if they don’t know the full pros and cons of shouse living can become wary of taking a risk.

In the not-too-distant future, they will probably realize the necessity of offering a product tailor-made for shouse borrowers. However, this doesn’t help fund your project today.

So, in this guide, we want to share information to offer the best chance of finding a company that provides a home loan for a shouse.

Table of Contents

What Is A Shouse?

A shouse is a combination of the words “shop” (as in workshop) and “house”. You may also hear them mentioned as shophouses or Shomes®, although the latter is a brand name and registered trademark. 

The concept of living in or next to your workplace dates from at least Ancient Rome or, more probably, much earlier. Storekeepers and artisans routinely opened up the front of their homes to sell their produce or advertise their services. 

We see the same work/life balance in medieval times when tradesmen, such as blacksmiths, combined their homes and forges into one building. 

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In the American Midwest during the 19th and 20th centuries, storekeepers added living accommodations to their retail stores or added workshops to their homes.

In agricultural areas, farming families would live in a barn with their livestock and farming tools. 

As you can see, the concept has been going on for centuries, so it’s little wonder that its popularity has increased with the rise in barndominium living.

In the mid-2010s, barndominiums, or barndos, became popular from the television home makeover show “Fixer-Uppers,” which showed viewers how to renovate a barn into a modern home. 

A pole-frame constructed barndominium, with a workshop or garage incorporated within the structure, is a shouse. But, not all shouses are barndos, as plenty of conventionally built structures contain a workplace.

However, with their open-plan living concept, the affordability of pole-frame barndo kits makes this shouse much more prevalent among those who want extra room for hobbies or a home workshop.

The open-plan layout easily adapts to the flexibility of having a sizeable, uninterrupted floor space for large equipment, vehicle garaging and maintenance, etc.

The Popularity and Benefits of Shouse Living

Let’s examine why owning a shouse is so popular.

Cost-effective

Designing a shouse using shared walls, infrastructure, and utilities makes building a shouse more cost-effective than constructing separate structures.

Versatile

Owners can use a shouse for almost any purpose. Artists, mechanics, furniture makers, artisan bakers, or hobbyists could use a workplace integrated with their homes.

Also, owners can evolve their living and work spaces as their requirements change.

Work Proximity

Using a shouse as a home and workplace eliminates the stress, expense, and wasted time of a daily commute.

This benefits those with a small business or who work from home and makes their lives more efficient.

Energy-efficiency

Integrating living space and work premises, we use our insulation, heating, and cooling much more efficiently.

Furthermore, designing a shouse allows us to incorporate sustainable resources and energy-efficient systems when we’re building it rather than retrofitting.

Community Strengthening

Working from a shouse enables us to be close to our neighbors and local activities, and know what’s happening in the community.

Efficient Use of Space

Integrating a living space with a functioning workshop, factory, or office maximizes the use of the space.

The ability to seamlessly move from home to work makes efficient use of time and eliminates the requirement for additional buildings. In turn, this protects the owner from extreme weather conditions that may otherwise prevent them from traveling to work.

Design Freedom

The owner can design their shouse to suit their preferences.

Post-frame construction encourages sizeable open floor spaces, high ceilings, and natural light. And, if they want to have small rooms within the shop, they can use easily configured temporary partition walls.

Barndominiums

Many shouses rely on the same construction methods as barndominiums, the other popular hybrid structure with large floor spaces and high ceilings.

Barndos have become prevalent in recent years, which automatically influences the rise in shouse popularity, thus increasing the appreciation of rural charm and practicality.

Unique Appearance

The shouse’s architectural creativity flourishes with its commercial and residential components blend.

In turn, this lends character to otherwise bland neighborhoods and creates distinctive properties to make our streets more attractive.

Storage Solutions

Shouses provide ample storage for those items that would be out of place in a home setting. Many people have tools, equipment, and craft or hobby supplies that would otherwise end up in a shed or garage.

Using a shouse lets us store and maintain these non-domestic items, keeping them secure and close to hand. 

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Increased Security

Using a shouse to live, work, and store your precious belongings means you are constantly nearby.

If your workplace was a few miles away or your hobby equipment was in a shed somewhere else on your property, they would be more vulnerable to theft and security issues.

To summarize, a shouse lifestyle is convenient, cost-effective, and combines practicality with a unique lifestyle. 

Financing Basics For Shouses

Suppose you want to use the shop part of a shouse as business premises. In that case, you must speak to your lender about this, as commercial mortgages aren’t the same as residential mortgages.

Furthermore, there are also federal government business development loans that you can apply for that aren’t the same as residential loans. But, you need professional advice from your tax accountant and speak to the lender’s business loan adviser.

However, if you want a shouse to provide hobby space, you can buy it with a domestic home loan. Therefore, the rest of this guide deals with domestic loans and leaves the business loans to specialist advisers.

Although shouse living is ancient, it’s not part of mainstream finance in the modern world. So, getting a home loan can be tricky, as many lenders aren’t familiar with the idea. However, there are ways to finance a shouse. 

A construction loan is a popular way to finance a shouse. You borrow the money to build it and then convert the borrowing into a standard mortgage.

Traditional Mortgage vs. Shouse Loans

Let’s compare a traditional mortgage with a shouse loan.

A Conventional Mortgage

A mortgage is the most common way of generating loan funding for a home purchase or remortgage.

  • Interest rates will be the same for the duration of a fixed-rate mortgage. This ensures that your repayments are consistent, regardless of the changes in the country’s economy.
  • Fixed-rate conventional mortgages are typically available for two or five years. However, other durations are available depending on the lender.
  • After the fixed-rate term is over, the borrower must refinance. Alternatively, the lender moved the loan to an adjustable-rate mortgage, which is not as convenient, varies over time, and may become more expensive.

A conventional mortgage is a home loan not guaranteed by a government agency. Typically, private lenders offer this type of home loan.

To be eligible, the borrower must have a good credit score, low debt-to-income ratios, stable employment, and a downpayment. Generally, the necessary credit score will be higher than a government-backed loan.

Usually, a traditional mortgage has fixed rate interest, whose rate remains the same throughout the loan’s duration, which borrowers can choose from various loan terms. Typically, this can be 15 or 30 years.

There are limits to the loans you can take out at the typical interest rates.

“Conforming” conventional loans stick to the maximum loans set by the FHFA (Federal Housing Finance Agency), with extra standards set by Freddie Mac or Fannie Mae. In contrast, “non-conforming” loans exceed the FHFA limits and are termed “jumbo loans.” 

Shouse Loans

Shouse loans are specifically for borrowers who want to build or convert a shouse.

Typically, these consider the requirements of borrowers who prefer a combined living space and workplace, and combine financing for both parts of the structure in the same loan.

Not every lender offers loans designed for shouses. Therefore, if you want a good deal, consult a lender specializing in these types of loans.

When you’ve found a shouse loan, they will be one of the following:

  • Conventional loans, either conforming or non-conforming.
  • Fixed-rate loans keep a fixed interest rate for the duration of the loan.
  • Adjustable rate loans vary with the interest rates set by the Federal Reserve.
  • Government-backed loans are backed or guaranteed by federal government agencies. These can be the FHA (Federal Housing Administration), VA (Veterans), or USDA (United States Department of Agriculture). Each agency has its unique criteria and benefits.

To summarize, traditional mortgages target a broad range of borrowers. In contrast, shouse loans cater to those with specific requirements for building or buying a combined living and work space.

Factors Lenders Consider for Shouse Financing

When you seek funding to buy or build your shouse, lenders consider several factors, and you must comply with these as much as possible.

Property Value and Appraisals

Probably, the most crucial consideration is how much you can afford to borrow for your shouse loan. 

Debt-to-income Ratio

Most lenders determine how much you can borrow by analyzing your debt-to-income ratio. This ratio compares your monthly expenses against your gross monthly income.

Typically, most lenders prefer you to have a ratio of between 0.3 and 0.6.

Credit History

The next consideration is how easily you can pay the monthly installments.

Generally, lenders use your credit score and credit history to determine the likelihood of satisfactory loan payments and whether you will continue payments until the end of the loan term.

As part of this assessment, you must prove a stable income and have the same job for at least two years.

Property Value

Next, show you’ve done your homework and are serious about building your shouse. Lenders want to protect their investment, so they need to see that the structure is worth the loan amount and that they can quickly sell it should you default on the payments.

Usually, if you were buying a shouse, the assessor could view the property and assess its value. However, because your shouse isn’t built yet, assessors must use a different route. 

You must provide detailed plans and construction drawings for a third-party appraisal of the shouse’s value and feasibility. Otherwise, lenders may view a shouse as an unknown risk, not worth the investment.

Therefore, the more supporting information you provide to the lender, the better it will be, and the more likely you’ll get the funds.

Downpayments and Equity

The amount you’re prepared to put down in support of the loan will also help minimize the financial risk as far as the lender is concerned.

You do this by providing a downpayment or equity.

Downpayments

A downpayment is the initial cash you pay upfront when taking out a loan for a house purchase. It provides two primary purposes:

  1. It shows the lender that you mean business and are prepared to pay a share.
  2. It reduces the amount you have to borrow. Larger downpayments mean that the lender pays less to make up the total amount needed for the project. 

Most lenders prefer you to make a downpayment using cash. However, there are other methods :

  • By combining a Home Equity Line of Credit or a Home Equity Loan with your mortgage, you may avoid buying Private Mortgage Insurance. However, you can usually only do this if your downpayment is less than 20%.
  • Sometimes, the federal government offers Downpayment Assistance programs, which provide grants or low-interest loans to help with downpayments. You should check with your local government for the required eligibility criteria.
Equity

Equity is the amount of ownership you have in a property. It’s the difference between how much you’ve left on your mortgage and its current market value.

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Therefore, as time passes and you pay off your mortgage, your stake in the property and the equity increase. Similarly, if the property’s value increases, so does the equity.

If you want to use the equity on something you own as collateral for a shouse loan, you can. Already owning land gives the lender more security for a shouse construction loan as they have something to sell if you default. 

Different Financing Options For Shouses

There are several financing options for shouse projects.

We’ve already mentioned them superficially, so now we should go into more detail.

Conventional Loans and Their Limitations

Conventional loans are prevalent in the US. However, they have stricter credit requirements than government-backed loans.

Typically, there are two types:

  • Conforming loans
  • Non-conforming loans

Conforming Loans

Conforming loans met the criteria of Freddie Mac and Fanny Mae, the US government-backed housing finance companies. Generally, conforming loans cannot exceed loan limits specified by the FHFA (Federal Housing Finance Agency).

Typically, the loan limit for a single-unit property is $726,200. However, in areas with a higher cost of living, the limit can rise to $1,089,300.

Non-conforming Loans

A non-conforming loan doesn’t meet the Fanny Mae or Freddy Mac criteria.

Typically, jumbo loans are classified as non-conforming loans because they exceed FHFA loan limits and come with much more stringent eligibility criteria and terms & conditions.

Construction Loans for Custom Shouse Builds

Construction loans are crucial when financing custom-built shouses, as they disburse funds to the project when needed.

Preparing for a Shouse Construction Loan

  • Thorough Plans and Blueprints: Lenders require detailed blueprints and construction plans. Providing this information helps assess costs and risks.
  • Independent Assessment: A third-party assessment of your plans ensures an accurate valuation.
  • Type of Loan: Decide on the type of loan for your shouse. Options include construction-to-permanent and construction-only loans. They both have pros and cons, and you should take advice on the best for you.
  • Compare Lenders: Explore multiple lenders to find the best fit for your project.
  • Estimate Your Budget: Calculate how much you can afford based on your debt-to-income ratio.

Draw Schedules and Disbursements

The lender requires a draw schedule (detailed construction payment plan) to know when to pay contractor and materials installments.

The gradual release of funds is known as construction disbursements. So, instead of releasing one lump sum, the lender releases the funds gradually as the contractor reaches certain milestones.

Typically, the draw schedule should align with the property’s value at each milestone. Many lenders have a specific format preference. So, check with them first before you go ahead and invent your own schedule.

Interest Rates and Terms

Construction loan interest rates are generally higher than conventional mortgage rates, mainly because they’re for only 12 to 18 months and aren’t secured by a home’s equity, unlike a traditional mortgage.

Typically, construction loan interest is around 1% higher than conventional mortgage rates and can be as much as 6%.

Several factors govern the interest rates:

  • Location – many regional factors affect the rates.
  • Type of property – rates vary with property type.
  • Loan terms and duration influence rates.
  • Project details. The type of shouse and its uniqueness will affect the rates.

Fortunately, you only pay interest on the amount disbursed to the project. Once construction has finished, you change the construction loan to a standard permanent mortgage at typical mortgage rates and terms.

USDA and Rural Financing Programs

If you have problems raising a downpayment or need more favorable interest rates because of a poor credit history, the federal government has various programs available.

FHA Loans

FHA (Federal Housing Administration) backs a home financing option offered by various private lenders. It helps those with low incomes or poor credit scores to cover all building expenses.

Typically, it requires a minimum downpayment of around 3.5%. However, other criteria, such as the debt-to-income ratio, are difficult to manage.

An FHA loan is to fund a primary residence only, so businesses using a shouse must try a different loan.

VA Loans

The Department of Veteran Affairs home loan helps veterans, existing armed forces members, and specific government agencies own their homes. The funds are for financing a primary residence or refinancing an existing home loan. 

VA loans don’t need mortgage insurance or a downpayment, and there’s no minimum credit score. The interest rates are lower than a conventional mortgage, and closing costs are limited to 1% of the loan amount.

There are specific eligibility requirements, so ensure you comply with them at the beginning of the application process. For more information, browse the website or contact your local VA representative.

USDA Loans

The US Department of Agriculture (USDA) offers government-guaranteed home loans from private lenders. However, you must relocate to an eligible rural area.

Also, they have business development loans, so business-use shouses may be an option.

USDA loans need no downpayment and have low-interest rates. However, you must use a USDA-approved contractor to build your home. Visit their website for further information.

Alternative Financing: Personal Loans, HELOC, and More

There are other ways to generate funding for your shouse.

But, they aren’t explicitly designed for buying a home. These include:

  • Personal loans allow borrowing for any reason. You negotiate the loan amount and terms with the lender depending on your debt-to-income ratio and credit history. Typically, if you have a credit score above 760, your interest rate will be around 9%.
  • HELOC. A Home Equity Line of Credit allows you to borrow funds based on the equity in your home.
  • Home Equity loans use the equity left in your present mortgage as collateral for a loan to build a shouse. They have a fixed interest rate, with a duration of up to 30 years. However, after taking out the loan, you must have at least 15% equity remaining in your home.
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The Role Of Credit & Financial Health

If you want to borrow money for a shouse, you must satisfy the lender’s requirements that their money is safe and that you can repay the monthly installments.

So, prove you have a good credit score and have the income to cover the loan.

Credit Score Requirements

Your credit score helps the lender determine your risk when repaying your loan. People with credit scores above 650 will get better loan terms and interest rates than those with lower scores.

To apply for a conventional mortgage, you must score at least 620. However, the federal government-backed programs aren’t so strict.

For example, the FHA loan needs a score of between 500 to 579 with a 10% downpayment. However, if your score is 580 and above, your downpayment drops to 3.5%.

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Addressing Debt-to-Income Ratio (DTI)

The debt-to-income ratio tells the lender the ratio between your monthly income and outgoing financial commitments. Therefore, the lender knows how easily you can repay the loan.

So, you must prove you have enough income to pay your new loan and current living expenses.

Improving Your Financial Standing for Better Loan Terms

If you want better terms for your shouse mortgage, improve your financial standing.

Follow the advice below to reduce the application time and ensure you get your desired loan.

Improve Your Credit Score

Pay off as many existing debts as possible, thus increasing your residual income and improving your debt-to-income ratio.

Increase Income and Savings

If possible, increase your income or savings by using one or more of the following tips:

  • Find an extra part-time job.
  • Move to an area with a cheaper cost of living.
  • Deposit your savings in a high-interest savings account to increase its value.
  • Reduce your monthly outgoings by cutting back on luxuries or choosing different vacation destinations.

The Application Process For Shouse Financing

Apply for a shouse home loan in a recommended way to get the desired funding. But, before we consider that, let’s worry about the contractor who builds your shouse.

Lenders prefer to know that you’re using professional and experienced contractors, which adds credibility to your project and the loan application.

Most lenders have a list of approved contractors in your area whom they’ve previously worked with and have passed their quality control. So, using a lender-recommended contractor will ensure the application runs smoothly.

Gathering Essential Documentation

A good loan application needs supporting documentation. So, get a copy of your credit report and check it for omissions and errors a few weeks before submitting your application.

You’d be surprised how often mistakes crop up in your credit report, or a previously completed loan hasn’t been signed off.

Anyway, check that everything is as it should be and get documents supporting your case if there are errors. Then, compile all the information into a format that makes it easy to read.

Remember, if you make life easy for the lender’s clerks and underwriters, they’ll often make life easy for you.

Proof of Income and Employment

On your initial mortgage application, the lender needs your employment information, including:

  • Job title
  • Company name and address
  • How long you’ve worked for them
  • Your current salary

Lenders like to have at least two years of employment with your current employer as proof of employment stability.

Furthermore, you need other documentation. Typically, this includes:

  • Recent tax returns
  • Recent W-2 forms
  • Pay stubs
  • Regular bank statements showing your income deposits

You must produce tax returns, bank statements, and annual profit and loss statements if you’re self-employed.

Property Plans and Contractor Bids

The lender needs information about the property you intend to build.

So, provide detailed property plans and contractor bids. 

Contractor Bids
  • Choose a qualified contractor experienced in building shouses or barndominiums, certified to work in your state, and holding full insurance. If possible, use a lender-approved contractor.
  • Include the contractor’s detailed cost estimates.
  • Estimate when the contractor needs payment for labor and materials. Usually, the contractor will provide a schedule in their bid.
Construction Drawings
  • The lender requires detailed construction drawings for your shouse.
  • Attach architectural drawings containing elevations, floor plans, and other standard information a qualified architect provides.
  • Get an appraiser’s report of your project based on the plans and an assessment of the site and its surroundings.
  • Include a detailed risk assessment to help determine potential risks and associated costs.

Working with Mortgage Brokers and Direct Lenders

There are two ways to find a mortgage.

Mortgage Brokers

Mortgage brokers act as a go-between to provide the best mortgage for your project. Ensure you choose an independent mortgage broker not tied to a specific lender.

Furthermore, a broker compares multiple mortgage companies on your behalf and selects the product with interest rates and terms that suit your circumstances.

Often, mortgage brokers assist with compiling and verifying documentation and help loan applications to reduce the chance of error. Usually, brokers get paid a commission from the lender.

Use a mortgage broker to explore different products, compare lenders, and find the best product for your situation.

Direct Lenders

Direct lenders, such as credit unions and banks, only use their products. The lender employs loan officers who work with you in applying for a mortgage. They receive a salary plus bonuses.

Use a direct lender, through their loan officer, to approve and fund the loan.

Navigating Loan Approvals and Potential Roadblocks

Finding your way through the maze of getting a mortgage for your shouse can be very challenging. You must understand the lender’s requirements, ensure you’re eligible, and know how to work with professionals with an in-depth knowledge of mortgages.

Ensure you follow the instructions given by your mortgage broker or loan officer and provide the requested information in the required format. 

If you have any problems, such as important information that’s gone missing, don’t panic, as this often happens. Don’t be afraid to inform your broker or loan officer immediately, as they often know a way around the problem.

Make sure you’re proactive in your application, and stick to the deadlines to increase the chances of successfully securing a mortgage for your shouse.

However, lenders reject approximately 13% of mortgages. So, don’t worry if they refuse your application.

Perhaps you only need a better credit score to pass this hurdle. If so, put things right and submit your application again. However, always take advice from a professional mortgage broker or loan officer on how to do this.

Frequently Asked Questions

Can I refinance a Shouse?

Refinancing involves renegotiating your existing mortgage either with your current lender or a different one. Many shouse owners find that interest rates may have dropped.

Alternatively, they may have a pay raise at work and want to renegotiate the mortgage agreement for lower interest rates or better terms. Moreover, you can also refinance when you’ve built up enough equity in your shouse to drop the Private Mortgage Insurance.

Usually, good reasons to refinance include:

  • Reducing monthly payments
  • Reducing the loan term
  • Switching from adjustable to fixed rate
  • Reducing the total interest
  • Canceling mortgage insurance
  • Accessing cash from your shouse’s equity

Are there any grants available for Shouse construction?

Several federal and state-funded programs help potential buyers own a home. Remember, you must always pass the particular program’s eligibility criteria, but applying if you’re eligible is worthwhile.

Generally, the best programs include VA, USDA, and FHA. But, if you’re unsure, contact your state and local government or a local mortgage advisor for more information.

How do interest rates for Shouse loans compare to traditional homes?

Initially, remember that interest rates depend on your circumstances, the lender’s policy, and whether you choose one of the federal housing program loans.

However, shouse loans follow the same interest rate trend as conventional mortgages. Having said that, borrowers with good credit rates and stable credit history can often secure mortgage rates well below the industry’s average.

Conclusion

Securing a home loan or mortgage for purchasing or building a shouse is no different from any other property mortgage. However, the only real problem is finding a lender willing to fund the loan.

Having found your lender, you must have the following:

  • A good income-to-debt ratio.
  • A healthy credit score and history.
  • Proof of at least two years of steady employment.
  • Enough funds for a downpayment and closing fees unless you’re using a federal housing program loan that doesn’t need these.

If you prefer a federal program, use one of the following agencies that back housing loans: USDA, VA, or FHA. Alternatively, ask your state or local government if they run any home loan assistance programs. 

Review mortgage requirements from lenders offering shouse finance options, and understand the processes involved. Then go for it, you won’t be disappointed.

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Adam Marcos

Adam Marcos, a veteran with 25+ years in custom home building, now serves as Managing Editor of BarndominiumZone. He passionately helps people on their journey of creating their dream barndo homes, offering valuable insights and practical advice. With a warm and approachable demeanor, Adam inspires readers to embrace unique living spaces that reflect their aspirations. Join him on a transformative adventure, turning ordinary spaces into extraordinary havens of creativity and fulfillment. Experience the magic of bringing visions to life, one barndo at a time.

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